For the past year Medallion Financial Corp., whose origins date to the early days of New York City's current taxi regulation system, has been at a yellow light.
Medallion, which in its 65 years has transformed itself from taxi operator to specialty lender for the taxi industry, was straining a year ago, analysts say, under its latest diversification: lending to small businesses in other industries.
Outsiders were concerned that the new business was distracting management from the core, generally well-performing portfolio of more than $250 million of loans backed by taxi medallions.
After last year's terror attacks, however, the trouble was compounded. Many of the drivers whose $230,000 city permits it financed were driving vacant cabs and missing payments. Medallion, in turn, wound up defaulting on a loan from FleetBoston Financial Group, which is now seeking to pull out.
A year later, Medallion is close to putting the finishing touches on a two-part recovery plan. Where Fleet has backed away, Merrill Lynch & Co.'s small-business lending arm may soon step in with a $250 million line of credit to replace the Fleet line.
The other part of the turnaround plan involves Medallion's application for an industrial bank charter, which it hopes to use to build a deposit base that will greatly reduce reliance on lines of credit to finance its business.
Medallion got its start in 1937, when a grandfather of Andy Murstein, its current president, bought one of the city's first 11,878 taxi medallions, for $10, for his own cab. (The price has since risen 23,000%, largely because supply is tightly managed.)
What began as a typical taxi company operating out of a garage in Queens has grown into a small-business lender managing $700 million of assets. Its borrowers now include coin-operated laundries, dry cleaners, and radio stations, and it recently opened an asset-based lending unit. It also has a taxi advertising business that controls the signs atop 10,000 cabs in the United States and 7,000 in Japan.
But most of its business is still lending to taxi drivers in New York, Chicago, Boston, and eight other cities.
Last year's terror attack had a major impact on the ability of New York taxi drivers to meet loan payments. Largely as a consequence, the delinquency rate on Medallion's loans was 9.4% by December, and on May 15 the company missed a debt payment of $56 million.
Fleet, its lead lender, which was looking for ways to minimize risk in the volatile economy, then sought repayment on part of its loan and raised the interest rate. Medallion is now in technical default - and scrambling for a new source of funding.
In March, meanwhile, Joseph Jolson, an analyst for JMP Securities in San Francisco, put a "sell" rating on Medallion's stock. And in June the New York ratings agency Fitch Inc. downgraded its debt.
On Aug. 14, Medallion announced that it had lost $1.8 million, or 10 cents a share, in the second quarter because of debt and refinancing charges.
In a normal economy a dozen banks other would have lined up to take Fleet's place, said Mr. Jolson, who no longer covers the company. "But in this kind of economy, particularly with Sept. 11, it didn't happen," he said.
But the Merrill line and the industrial bank charter should vastly improve the company's position, Mr. Jolson said. "I did put a 'sell' on them [now], but if they can pull this off I'd upgrade to an aggressive 'buy.' "
Mr. Jolson said he has bought Medallion stock as a personal investment and his firm has a small position in the company too.
An industrial loan charter allows holders to make loans and accept federally insured demand deposits. The charter would lower Medallion's cost of funding by letting it take deposits and give the company much more financial flexibility.
But John Olert, a managing director of financial institutions at Fitch Inc., said that though the bank charter brings some funding stability, it also brings regulation. "Regulators have been very active in other sectors," he said. "There's not all upside, and it's difficult to know how well prepared Medallion is to deal with added oversight."
Moreover, both Mr. Olert and Mr. Jolson argued that Medallion should concentrate on its core, successful business lines. "The taxi business is their core franchise, and though it's gotten more competitive, it's a good business," said Mr. Jolson.
Mr. Murstein says traditional banks have shied away from the business because they do not like the intangibility of the taxi medallion - and simply do not understand market's potential.
Medallion's taxi business is substantial. New York's almost 12,000 medallions today are worth over $2.5 billion. Taxi medallions turn over on average every 29 months, Mr. Murstein said, bringing Medallion a steady flow of new customers who need loans. At the end of last year the company had 2,299 loans outstanding for taxi medallions, with an estimated value of just over $205 million.
The interest rates on its medallion loans average around 9% but vary from city to city. Last year the company's new loans to taxi borrowers averaged 8.48% in New York, 9.86% in Chicago, and 11.41% in Boston. The loans are made on five-year terms with a 15-year amortization.
Each taxi in New York needs a medallion. Mr. Murstein's grandfather thought they were worthwhile investments and kept acquiring them through the 1940s and '50s, eventually amassing a fleet of 150 taxis.
At first the family business was a simple taxi company. By the mid-1960s however, the medallions had appreciated in value to about $20,000 each, and Mr. Murstein's father, who had taken control of the company, decided to start selling.
The common thread is a customer base that is predominantly immigrants, cash-strapped but eager for advancement and unable to obtain financing from more traditional bank lenders because they lack credit histories.
"He saw what a good lending opportunity it was, because these guys were good payers," Mr. Murstein said.
