A new Boston hedge fund is betting that the rise of Uber and Lyft will mean disaster for an obscure lending company that provides loans to taxi medallion owners.
HVM Capital has shorted the stock of publicly traded Medallion Financial — which uses the ticker symbol TAXI — betting that taxi medallions will lose value and owners will stop making payments on their loans. A shorted stock is one in which a speculator borrows, then sells stocks — hoping to repurchase them if the price drops and return them to their owners, pocketing the profit.
"If you have a $700,000 medallion that's worth 400K, why would you keep making payments?" asked Gordon Gossage, an analyst with HVM Capital and an Uber and Lyft driver who has driven more than 2,400 passengers. "(Medallion Financial) has these loans on the books as assets and they will become worthless, long before medallions become worthless."
As an annual average, Boston medallions continued to climb in value in 2014, with the 41 sales averaging roughly $672,000 each, according to Boston taxi industry newspaper The Carriage News. However, only five medallions were sold in the last six months of 2014, for an average of $599,000. A number of medallions sold for $700,000 last year, but none after April.
"The license itself becomes superfluous. Why would any rational player be willing to pay a premium for a license, medallion, that doesn't confer the right to do anything more than any ride-sharing vehicle?" said James Hickman, the chief investment officer of HVM. "If medallion values on the secondary market go to near zero, borrowers will default and lenders against those assets will have to write down the loans."
Medallion Financial did not respond to multiple requests for comment, but the company said in its most recent quarterly earnings report filed with the SEC that Uber and Lyft pose a threat to its business.
"In the event Street Hail Livery licenses and increased competition from ride-sharing and car-service apps materially reduce the market for taxicab services, income from operating medallions and the value of medallions serving as collateral for our loans could decrease by a material amount. This could increase our loan-to-value ratios, loan delinquencies, or loan defaults," the company said in the filing.
Medallion Financial's stock has dropped significantly in the last year, dropping by roughly 30 percent over 2014. HVM is also not the only firm counting on a further decline.
As of mid-December, more than 1.7 million shares of Medallion Financial were sold short, three times as many as the year before.
Uber won a key regulatory battle in Massachusetts last week, when the state Department of Transportation filed regulations that require background checks and insurance for Uber and Lyft drivers, both requirements the companies say they already have in place.
Hickman said that will push the prices of medallions down even more.
"This decision is another nail in the coffins of the old industry structure and the secondary market value of the medallions," he said.
The regulations will not take effect until the Department of Public Utilities, which will regulate Uber and Lyft, files legislation and undergoes its own regulatory process.
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