Finablr (LSE: FIN) saw a share price drop of 27% in its trading on Friday. Who, you might be asking? At an initial glance it’s understandable if you may not be too familiar with the FTSE 250 firm and the business it carries out. However, if I were to use the name Travelex, you would likely have heard of it, given the reach that the foreign exchange broker has within the UK.
This fall put the share price at 95p as of the market close on Friday, easily the lowest it has been during the brief time it has spent in the public market. A bargain, you might think, but I don’t agree. Buying shares after a steep fall can be a good strategy, however it really depends on the reasoning behind the fall, and in this case it looks serious enough to warrant extreme caution. Remember too that no dividend has been paid or is expected, so there’s nothing to cushion future share price losses.
The background
Finablr bought Travelex in 2014 and it now sits within the group and acts as a holding company for this financial services firm along with some other smaller investments.
Further, you may of heard of a certain Mr Shetty, who is an Indian entrepreneur and the majority owner of Finablr. He also founded NMC Healthcare, a firm I wrote about earlier due to its poor performance on the FTSE 100 in 2019.
The cause of the drop on Friday was the emergence of information regarding Mr Shetty and his use of shares in Finablr to finance the acquisition pool for Travelex. Of the 62% ownership he has of Finablr, he used 56% of these shares as collateral against the debt taken when buying Travelex.
The company released a statement on Friday regarding the notification that these shares had been used as security for borrowings, which obviously triggered the stock move lower.
While I imagine we will have to wait for further exact details of the mechanism used to package up this deal, there seems to be no foul play. Finablr says that it’s business as usual.
What’s the problem?
But there are several issues with this situation. Hypothetically, let’s say the bank calls on the collateral because repayments can’t be met. The Finablr share price could fall steeply if the shares had to be sold off in chunks to provide liquidity for the bank.
Secondly, what if the share price in Finablr falls anyway and the value of the shares pledged isn’t enough to be used as collateral any more? How would this affect Travelex’s funding and could the debt be requested to be paid off immediately, putting a strain on both companies?
All in all, it’s a messy situation which I don’t feel will be resolved quickly or easily. As a result, I would stay away from investing in Finablr for now and look at some more popular companies, some of which are discussed here.
