Earlypay Limited (EPY) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Earlypay's half year results webinar. Today is Friday, the 24th of February 2023. I'm pleased to welcome today's presenters. We have Earlypay's CEO, James Beeson, CFO, Steve Shin and COO, Paul Murray. Welcome, James. [Operator Instructions] I will now hand over to James to provide a brief overview of the company's half year results. Over to you, James.

Thank you, Grace. Thank you, everyone. Firstly, obviously, it's been a pretty eventful couple of months. And the information we've been able to share is sparing for good reasons there because we -- it's fast-moving and ever changing [indiscernible] receivership. So finally, we were able to say something ourselves some today, which hopefully put some clarity out there. So apart from that, I'll jump straight into it. Start with the reported earnings. So the average funds in use in the first half grew by 40% and interest income grew broadly in line with that. The big problem we had was that interest expense leaped by 133%, which crushed our margins. So net interest revenue only grew by 5%. Now I'll talk a bit more about why that is the case and what we're doing about it. Firstly, I'll talk about the provisioning. So there were some very significant provisions taken in this half. $9.6 million against RevRoof, that $30 million exposure that we have, and that's mostly across invoice and trade. We also increased our other specific provisions outside of RevRoof these generally were impaired clients that we've had in the past and the outlook for our recovery has deteriorated. So we've increased the specific provisions accordingly. And again, that's mostly invoice finance and trade, not -- no invoice sorry, no equipment in that. And then generally, with the general provisions, we picked that up as well by $1.4 million. There's $1 million of that on invoice and trade and $400,000 on equipment. That's just to prepare for future losses to put a bit more of a buffer there. Obviously, the economy is quite difficult at the moment for individuals as well as SMEs and income is broadly accepted that economic times are going to get more difficult in the future. So we've increased our general provision with that in mind. So altogether, the profit before tax for the first half was down $7.5 million. And when you add back some of the one-offs, which there were some restructuring costs where we restructured some people out of the business. And also, there was an adjustment that we had to make a one-off adjustment that won't recur again relating to some income that we booked in the past for equipment finance that we normalized for. So underlying NPAT went to adjust for those comes out of a loss of $4.3 million. We talked a bit at the AGM about the changes in Board and management that I'll just quickly go over again. So Greg Riley resigned as Chairman in the first half of this financial year, and he was replaced by Jeff, Geoff Sam, Daniel Riley resigned from CEO. Initially, he was on the Board and I took over the CEO responsibilities. We have Paul Murray, who's on the call today. He's joined us as COO. I think it was November that he joined and recently, Daniel resigned from the Board. On the balance sheet, the balance sheet remains very strong, really, given the provisioning that we've had in this half and the net tangible assets remains at $45 million, which is $0.156 per share. And given the magnitude of RevRoof provision and events, then it's given us quite a lot of comfort that the balance sheet is quite -- in quite strong shape. One thing to acquire here is the borrowings to receivables. That's increased by 25% from the first half of '22 to the first half of this year. Now that's important because it shows that in the first half of '22, we funded a large portion of our loan book with our balance sheet, which doesn't have any interest expense against it. Whereas in this half, that's jumped considerably, and there has been quite a lot of interest expense against those extra borrowings. So that's something I'll talk about a bit later because that's really weighed on our margins and we have a firm strategy to fix that up. On the funding, I've -- we've talked about this before, but I'll quickly run through it again, our current funding structure. We have $450 million of headroom, and we've drawn about $328 million of it at the moment. The main warehouse to invoice finance, that's linked to a floating rate basis, and we can pass on any increases in interest costs directly to our clients because all of our clients now are linked to the Earlypay base rate which we have full discretion to change. In the past, some of our clients were on fixed rates, but many of them were linked against an ANZ reference rate. And often, it took up to 2 weeks for that bank to increase the reference rate despite the fact that the RBA rate raise. So we're always playing catch up with that, so that's fixed now. And that's a short weighted a little bit of margin compression in the first quarter, but that's resolved. The trade finance bond. This was brought in April 2022. So there was no -- it wasn't in place for the first half of '22. And that's for $30 million. Again, it's a floating rate linked cost of funds, and we can pass that on to our trade finance clients using the Earlypay base rate. Equipment finance, we've got a relatively nice facility for equipment. It's equipment lines are fixed rate. And this is the basis is floating rate, but we have an interest rate swap in the same tranche to take that away. So essentially, it's fixed and fixed. There's no margin compression resulting from that. The Mezz, the $20 million Mezz that's a fixed rate bond. So there's some that doesn't affect the NIMs. What I will say about that structure, though, is that the size of the equipment finance pool is bigger than what that $20 million of Mezz supports. So -- we've had to chip in, not only our normal first loss piece, but also the Mezz recently. So it makes it quite capital-intensive to grow the equipment finance book, which is why we backed off that growth return when we refinance the financing structures will have some space to originate a bit faster in equipment finance because it is an important product that we offer alongside of invoice. Warehouse facility 4, it's small, but there is actually a mismatch there. We fund fixed rate loans, we fund the floating rate warehouse which is not ideal, that time we have very short-term plans to get rid of that. And essentially, what we'll do most of that warehouse facility 4 will be pushed into warehouse facility 3 cheaper and hedged. The corporate bond. It's $20 million of the corporate bond, which is variable. So given the rate increases in recent months, that's increased the firm's interest expense. Now that interest expense almost entirely gets allocated to the equipment finance business. So that's really weighed on the margins in the AF business, the [ NIM AF ]. That's where we are today. It's kind of organically grown over the years. This funding structure, and there's lots of moving parts. And it's probably not the most sufficient from a cost of funds perspective or also from the perspective of how much equity we required to check in. So we're well underway to refinance these structures into a simple structure. That can release an equity, which can be used to strengthen the balance sheet or for inorganic opportunities or pay dividends eventually. And also having a simpler funding structure will give us more flexibility and scalability to grow the equipment business as well as the invoice finance business. And that -- any equity that's released from a restructure we could use for also to pay down the expensive or relatively expensive corporate bond, which is giving us some headaches at the moment. And overall, we'll reduce our cost of funding and get some of that margin back that we've lost over the past couple of periods. It's also one of the other things that is helpful is that outside of this current quarter when we're in loss -- made a loss. Generally, Earlypay is a very profitable business that consistently makes money, and we can increase our cash reserves relatively quickly as the months and quarters right by retaining profits. RevRoof, so just I'll briefly summarize the background. I guess it's pretty well known. But -- they're our biggest client with around a $30 million exposure spread across invoice equipment and trade. They went into voluntary administration on the 7th of December last year. On the 23rd of December, we appointed Grant Thornton, as receiver manager, of assets at RevRoof, and that was just to give us more control over the assets to increase our recovery. Part of the actions that Grand Thornton took was to actively run a sale process of RevRoof and when I say RevRoof, I mean, RevRoof Proprietary Limited and also painted steel technologies, the consolidated group. But the reason I mentioned that is that on Monday night, the receiver entered into an agreement to sell the assets in the business of RevRoof Proprietary Limited. There is 1 condition there, condition precedent that is the assignment of the landlord leases, the property leases to design group, the new hire. But the sales did not include painted steel technologies, so the receiver is still trying to do what they can to recover our exposure from that entity. But at the moment, they're taking steps to shut down operations. One thing that's very important is that the assets that were solved for RevRoof it's the plant and equipment and the stock and other things like that. The accounts receivable ledger, it stays with us, and we continue to collect out on that. So that's not included in the sale. And given the extra clarity we now have about the proceeds -- expected proceeds from the sale of RevRoof Proprietary Limited and some other I guess, uncertainty that, that has been revealed recently. We've done other parts of our exposure. Then we've taken a specific provision for that $9.6 million in the first half. And importantly, because it's a big number in -- after the reporting date, after 31st of December 2022 in the second half, we expect to incur about $2 million of costs associated with the receivership receiver fees and legal costs and other bits and pieces. So that's also a material number. Now I know everyone would like to know more about this, but it's still in progress. It's an active recovery, and we have been very careful to share what we can share without jeopardizing our prospect of recovery. So I'd rather not share too much more than what I've shared on this page, which I hope people understand because we want to maximize our recovery and not mess things up through our own doing. After RevRoof [indiscernible] in December, we had a really thorough look at all levels of the business, really, we looked at the Board and the governance structure that we have and that started at the risk management framework that we have, our risk appetite statement, the risk register, how that's maintained. And we made some -- we're in the process of making a lot of changes at a governance level. The chart on the right-hand side, it speaks for itself. The exposure to RevRoof was very outsized given the amount of net assets in our business, given the amount or size of our loan book. And outside of RevRoof, then the next exposure is approaching [indiscernible], it's probably a client that won't be with us for much longer. So the others have funds in use of less than $10 million as of the end of January. So we're going to bring in -- we have brought in a maximum single client exposure limit of $10 million. Now this is -- that's the number for now, but it's a fluid thing. It could change as the risk appetite of the Board changes. And it's going to be reviewed on an ongoing basis. We don't want to pin ourselves down to 1 specific number, but that's where we are at the moment, and that's something we talk about all the time as a Board. Another thing that we learned from RevRoof is that trade finance, it's a very different product to our core product, invoice finance where most times, if there's a problem with invoice finance, the money keeps coming into the collections account and the exposure pays down when you move on. Trade, it's a different sort of underwriting skills involved. It's more cash flow based on invoice financing and also recovery as we've learned, can be a real pain because as I said, you don't get the collections coming into your account, you don't go and pick up some yellow goods and take it to the auction. There's stock, and it just becomes a bit confusing sometimes. So that's -- there are a few reasons why we want to reduce our exposure as a business to trade finance. We do have some positions at the moment, and we're reviewing those to make sure that we're going to hang on to the ones that we're comfortable with and the ones that are outside of our risk appetite, we'll look to do something about. Another learning was at the Earlypay platform RevRoof weren't using that to start with. And there were some operational and technology things that happen that really reminded us of the importance of investing in that early payer invoice financing system and getting our clients across to that as soon as possible. And then just generally, the operational policies and procedures have been reviewed and gone through thoroughly and amended just to make sure that we really can mitigate against this sort of event happening again. Although having said that, we're in the business of lending money and things will go wrong, and we will take losses. But there are some specific things RevRoof which we of that we could do better, not least the ridiculous size of the exposure. The verification of invoices we always have done that, but we've beefed up our approach to that look a little bit more structured and consistent across all regions. And we've also changed the old structure a little bit, where rather than having groups regionally performing functions we've centralized it, so there's greater specialization of those teams. And you get a lot more consistent output from them rather than teams scattered around because that can still drift away from what's required. So pro forma financials. The intent here is not to shy away from what happened with RevRoof, but it's such a material impact on the financials that we thought it made sense to strip it out and look at what the business looks like without that -- those big numbers affecting it. So the story though is largely similar to the reported P&L, where we've got strong growth in average funds and us. But the interest expense line, it shows up here again, it's massive and it's really bringing a lot of pressure on our net interest revenue. So we grew the book by 30%, but then our net interest revenue actually went backwards. So once we address -- and almost all of that is the cost of funding issue. There are some things that we can fix on the customer side. For example, part of the explanation here is that we had some bigger clients come on and be clients generally demand, lower margins, that was part of the reason. Also, trade because of our expense cost of funding, trade was dilutive to the overall margins relative to invoice finance with the shift to having a more granular portfolio and less of those big concentrations. We expect that the average client size will be less going forward and smaller clients typically can generate higher margins. The outside of RevRoof as well, there's a $4.5 million credit loss provision that we took for the other parts of the business outside RevRoof. And once you add back those one-offs that won't recur again in the amortization, the -- we actually had a profit once you take out all the other things in the first half, which I know it's not real, whether it should give a sense for the kind of momentum that the business has and the potential that it has. We can keep growing organically, which we seem to be doing no problem in Salesforce, the pipeline looks strong. We've had a strong start to the year despite it being seasonally slow. We can fix up the issues we have with the margin compression then we're in really, really good shape for the back half of '23, but particularly in '24. So Invoice Finance and Trade Finance segment. A similar story as before. It's all about -- the growth hasn't been a problem so far, all about recovering those NIMs. Trade finance bond because there was no interest expense associated with that, and that $30 million bond came into play was just before this half started, and we get the full wack of interest expense on that, which is the weight on the margins in this segment. The cost-to-income ratio has crept up just because most of because net revenue fell was flat. But we're pretty focused on that. You'll see on the next page that our cost-to-income ratio for equipment has improved a lot. We're always looking for efficiencies to run the business better, and there are some opportunities on that, that will probably flow through in the second half of '23. And with -- back to margins, you can see down the bottom there, the net revenue margin fell from 23.5% to 18.2% [ Pay-to-Pay ]. So that 22%, obviously, if margins fall at that, and we have to make that up for in funds and used to be able to grow net revenue. So it's hugely important that those margins come back. And we think that with the changes on the financing and the other tweaks that we're going to do. We're hopeful that we can get the net revenue margin back up to north of 20% in coming quarters for the invoice and trade finance segment. For Equipment Finance. First of all, the cost to income ratio improved nicely because our origination slowed in this product in the first half, then we took some costs out of the business to align with that. So that time that's helped us there. The equipment finance originations, they did slow because -- partly because of that reason I mentioned earlier how we've maxed out the warehouse funding facility without having to chipping in a lot of equity. So that's part of it. And just generally, we see invoice finance as being our core product. Now it's not to say that equipment finance won't be offered more aggressively than it is now at the moment. And now it's only offered to invoice financing clients because I think that we do a pretty good job in certain segments of Invoice Finance. We're never going to be super high volume, low-margin guys. But the clients like the color that we target for invoice finance. I think we can have very good risk-adjusted returns where we have attractive NIM and can manage the risk properly. So this will probably the book will probably decline a little bit and then going forward, probably grow. The performance on this book, it's still really strong. So arrears past 30 days is still less than 25 basis points on the book ignoring RevRoof. But despite that, we increased the credit provision here by $300,000 to add a bit more buffer given that there is great probably just has only one way to go, and that's up. And on the net revenue margin for equipment, what really hurts equipment on the margins is the fact that it gets all the interest expense from that corporate bond, which is probably not realistic, but it has to go somewhere, I suppose. But once we restructure our funding facilities, and we expect to get the net revenue margin on AF back up north of 10% pretty quickly. In terms of the outlook, we've -- the focus on invoice finance and, to a lesser extent, equipment finance and deemphasizing our efforts on trade finance. The thing that gives us confidence about that is that invoice financing, it's really underutilized in Australia. You can see here that of the more than 2 million SMEs in Australia, 1 million have -- sell B2B, which is a requirement of invoice financing because we want debtor businesses. And then of that 1 million, there's around 100,000 SMEs that would have a budget that's eligible for factoring. And of that 100,000, there's only about 5,000 SMEs that actually use invoice finance in Australia. And of that, we only have was at 10% by number and around 7% market share based on funds in use. So there's 2 opportunities there to grow the category to make invoice financing a more popular product amongst business owners then that will definitely help us to increase that -- will that the 5,000 as a proportion of the 100,000. And then also with market share, I think there's a lot of opportunity there as well. So the likes of CBA coming into the invoice financing market. The first thought is that that's a bad thing, it's more competition. But equally, to increase the awareness of the product and grow the category like we talk about here, think the banks being involved is important for it to be [indiscernible] financing to be understood as a feasible source of financing for SMEs. And also banks, I don't know what their credit appetite is, but they might still want to bank quality clients, even though it's factoring. So there's always going to be a spillover that can come to the nonbank lenders like us. Our strategic focus. So it actually hasn't changed much over the past few months. We've just been I guess, side swiped by the RevRoof events, which has taken up a lot of energy and forced us to focus probably in a healthy way on improving our weaknesses but the strategic priorities here remain the same, that warehouse funding enhancements point, it's super important to get our margin back. The marketing-led distribution for invoice finance, we see that working. Like as I said earlier, our pipeline is strong. We're really getting some -- it feels like we're increasing our market share as well as making asset finance brokers that do equipment financing making them aware of the benefits of invoice financing through our Earlypay scholarship program, which is something we've run every couple of months. We put 40-odd asset finance brokers through that and explain to them the benefits of invoice financing and how I can work alongside of asset finance, and we're getting really good traction with that. So that's been a really positive thing for helping with our distribution. Cost control, just super focused on that. We make good use of outsourcing in the Philippines and also through investing in technology, then we expect that generally, there will be some ups and downs. But generally, our cost-to-income ratio should keep trending higher. And as I just mentioned, the technology investment, it's been a bit delayed recently because of most of our business has been focusing on RevRoof and improving our operational procedures and policies and those sorts of things. But the technology on the platform continues to be built out, and we're slowly migrating clients off the legacy system which we only have 1 now, by the way, we retired 1 a while ago. We have 1 legacy invoice financing system in the Earlypay platform. So we're migrating across between those. Just keep investing in that because we strongly believe that our own-end platform can be better than these off-the-shelf platforms, which will help us serve clients better manage risk better and give brokers a better experience. There's just a bunch of benefits that come out of that we want to double down on it because that's really one of the unique things about Earlypay, having our own proprietary software whereas our competitors, they always off-the-shelf software that it's -- if you want something change, that takes a long time and it's expensive and to control our own destiny with onset, I think is a huge competitive advantage for us. We continue -- we have 2 equipment finance platforms at the moment, just for the legacy acquisition reasons, but we're working to get rid of one of those right now. So that should -- we should be back to having 1 over the next few weeks. So these sorts of things, just making the business more efficient and having less systems, that means less reporting. People like to log into more than 1 system to consolidate all that. It brings really strong benefits. And the last one, a prudent approach to lending in an uncertain economic environment. This was there a few months ago, which in hindsight is not how things played out, but it really is a focus of ours. And the improvements that we made, we do think that we're going to be well positioned to especially with invoice financing, doing what's financing really well and keep the losses down. And because we think the invoice financing really is a strength that we should play to. And again, the risk and operational framework improvements have been -- they've been massive. We've made so many changes. It's taken up everyone's time. But we really feel like we've got great foundations strong enough. The outlook. So the second half of this year, is that $2 million that we'll incur for the receivership cost, which is a bit of a headwind, but that will come out of pro forma because it's totally [indiscernible]. But outside of that, as I said, we're a profitable cash-generative business outside of recent events. So I expect that we're going to get momentum back pretty quickly in the second half of this year. The provisions that we've taken, we feel like it's right now, like if conditions change or events happen, then we might have to change them, but we feel like they're pretty much where they need to be. So we don't expect there to be any more material increases in those going forward, whether it be the second half of this year or even beyond that. But then when we hit financial year '24, then we're going to start to get the benefits of the funding improvements which is huge and critically important. And then having focused growth on invoice finance and to a lesser extent, equipment finance with -- and really deemphasizing trade because I don't think we're planning to our strength in that product. I think we can produce some really attractive risk-adjusted returns. The new single borrower exposure limit and just the general approach of the sales team now. Again, in the past, we've had BDMs that might target really big deals and then they've a lot of comms and they wouldn't feel a need to do lots of smaller deals. But the fact that we're reporting that limit. I've noticed that the mentality of BDMs has changed straightaway. And already, there are signs that we're building up a more diversified client base and also clients [indiscernible]. And then the cost focus that I've talked about a couple of times already, we're just going to be super focused on that because it's going to take a little bit of time for our earnings to recover, but we want to make sure that we're as lean as possible when we bounce back to full strength. So that's all for me. I'm ready to take questions.

Thanks, James, for that. There's just been a number of questions come in. So I'll go through these one by one. RevRoof assumed the $9.6 million is best estimate of loss. What are the chances of blowing out further? And what would worst case look like?

But based on what we know today, that's the right provision.

Okay. The next one -- it's quite lengthy. So just bear with me while we go through this one by one. Just 3 months ago, at the company's AGM, you provided a very upbeat assessment of the company's recent performance and its future prospects. Your presentation to shareholders on the company's outlook made a number of points about Earlypay's business, including, it takes a prudent approach to lending in uncertain economic environment, leads with a well-secured employee finance product with a disciplined risk framework, has market-leading proprietary technology and an intelligent use of data and perhaps now most pertinent of all as a lender, Invoice Finance offers exceptional risk-adjusted returns is done well, less than 3 weeks later, shareholders are informed that our largest client has been put into administration. And Earlypay's exposure was as much as $29 million. So the questions to you, James. Number one, if Earlypay systems processes and supposedly market-leading technology were as good as suggested at the AGM and indeed, as integrated with its client's financial and accounting systems as suggested to be able to assess its client's financial health in real time, how was Earlypay completely -- how was Earlypay completely unaware of the precarious financial position of its largest client.

Firstly, it is a bit embarrassing to look back at that because clearly events heaped pretty quickly after that, so that we do have flaws in the way we go about things. So the Earlypay platform points, this client wasn't on the Earlypay platform. It's -- and as I said, that's why we want to continue to invest in the platform because there are benefits that, that will bring -- that will mitigate against some of the risks. And if we have a big loss, and we don't learn anything from it, and we don't change things, then that's bad. But our achievement is that it's an opportunity to get better at all levels, as I said earlier, we've made changes to make the business stronger. So it's embarrassing, but we're doing all we can to remedy it.

Number 2, part of that question, second part. Almost as difficult to stomach was today's revelation that Earlypay would be taking another $4.5 million of other expected credit loss provisioning. I would put it to you that the magnitude of this bad debt provisioning relative to the company's typical half year underlying profit is a further indictment of Earlypay's risk management practices. Would you be able to elaborate on how such a large bad debt provision came to be required, how long these clients have been struggling and what safeguards can be implemented to keep bad debt at a more reasonable level relative in the future.

Okay. I've answered some of these questions already. But the increase in the provision, away from RevRoof, a part of it is specific provisions against clients that we already did have specific provisions against. And as time has passed, then the likelihood of recovery has deteriorated. So we increased the specific provision. So that's mostly an invoice finance. I think none of that is in equipment finance. And with the general provision increases, again, the economic environment is tough. Insolvencies are going up. There's more stress through the economy generally. I think it's reasonable to expect that lenders, not just us, but all lenders will have higher losses going forward. And we want to make sure that we have an appropriate general provision against that. Now that's not to say that it won't be enough. But right now, again, just the RevRoof provision right now, we think it's appropriate. And the tech platform stuff, I've answered that. We continue to work on it. Not all clients are on that platform yet.

Okay. Third part, following the absolute dissemination of market and shareholder confidence in Earlypay's risk management and lending practices, it was pleasing to see the company has taken on board some lessons from this sorted chapter, including implementing changes to its business practices and investing further in its proprietary software and data infrastructure. However, I had great trouble reconciling your accompanying point about the need to retire less sophisticated legacy platforms with the AGM's presentation about market-leading proprietary technology. Can you please help shareholders for gaping chasm between the 2 apparent parallel realities.

We have 2 invoice financing platforms, one legacy one from before and the new one that we continue to invest in and move our clients across there.

And the last part, finally, a more general question for our future on reflection, is it fair to say that perhaps Earlypay has been too aggressive in chasing rapid growth at all costs without a proper and cautious enough assessment of the risks involved.

I think that's reasonable to assume to some extent. I think the way we've grown into trade is probably the most relevant example of that. Trade is a risky product and invoice finance and equipment finance. And growing quickly into that, we probably should have been more measured. But we're -- again, we're -- we've learned our lesson. We're reducing our exposure to trade. And yes, all we can do now is deal with what's in front of us. And we've overhauled our approach to managing risk. And hopefully, these things are -- they will happen again because we're a lender and s*** happens. But hopefully, it won't be able to scale again.

Okay. Next question. How have lenders responded to the loss? Any lockup risk covenant breaches worries of renewal, et cetera?

That's a good question. So lenders, I guess, he means funders. So we have a close dialogue with all of our funders, and we've kept them up to date with the going line of this. We haven't breached any covenants and the funders comfortable with things. It probably has delayed the refinancing at the end of last year at the AGM, we expected to do that in the back half of financial year '23. That could push a couple of months just because naturally, it's not a good time to go ask for money from funders when we've got this RevRoof stuff hanging over. So as that's resolved, then we'll get back to it and get it done.

Next one. Will the company need to raise additional equity capital to reduce the gearing percentage in the foreseeable future.

No, it's not the expectation. As I said, we're a profitable company that has the months [indiscernible] -- will continue to accrue retained profits, if you don't pay the [indiscernible] dividends and also the refinancing that's going to give us a significant amount of equity back as well. So no it's not the current intention. Well, just one thing on that, it's an interesting point. The borrowings to receivables, the fact that, that has risen some amount. So I think we do want to correct that. I think that we'll have some efficient warehouse funding structures in place. But also a portion of the balance sheet, there will be a buffer there that will be supported by equity. So I would expect that, that percentage will probably reduce even though we -- we'll have to be next less equity on our invoice financing facility. I think that, that percentage will fall a bit, hence, reducing gearing.

All right. Do you think in refinancing the warehouses, you'll be able to maintain, improve the lending margin. Surely, there's a major risk given credit impairments that lenders will look to jack up the margin.

We were in touch with -- well, first of all, the advisers that's helping us with the refinancing. He speaks to funders all the time and also directly with funders and there may be a little bit less benefit than there was a few months ago. But from all discussions, it should provide us, hopefully north of 1% benefit on the invoice financing and equipment. And then there's probably more benefit on the trade, which is very expensive at the moment [indiscernible] into one of the other warehouses. There will be a pickup of more than that. So to answer the question, we definitely expect there to be an improvement in our interest expense through refinancing, not to mention the equity that's released. That's almost just as important, having that equity out because our funding structures are very equity-intensive at the moment. As I said, the [ EF, ] we're putting in near enough to 25% equity in that because the [ Mezz ] is big enough. And then on the invoice finance, we're putting in 10% as well. So if we put some 5% Mezz in there and just putting a 5% equity contribution that really frees up some equity as well as make our return on equity more attractive.

Okay. Two parts to this next question. Can you please elaborate on the $4 million of provisions taken outside of RevRoof, as it looks to relate to issues outside of first half. And can you please comment on the exposure limits going forward per individual client.

I think I've dealt with that, the $4.5 million of provisions, a portion of that is specific that relates to clients that we already had specific provisions against but we've increased those because the prospects for recovery have worsened. And then just generally, making the general provisions higher given the uncertain outlook. The exposure limits, can you please comment? Well, that's the $10 million that we're working to, I think that that's at the moment, it's a constant dialogue with the Board about what that right number is, how it should be thought about. But that's where we've gone to immediately just to make a quick change, but that's the analysis of that is an ongoing thing and it depends on how the Board's risk appetite changes. Hopefully, I answered that.

Thank you. The next one, the annual report refers to an insurance coverage of about 40% by line trade for the invoice financing book, would you look at increasing the insurance coverage?

First of all, that 40%, it's 40% because a lot of the debtors is like Coles and Woolies and the big guys, we don't ensure, that would we increase it. I think that trade credit insurance for us, but also for clients, for our clients that have credit risk with their debtors. It's a very appealing products at the moment. So we are thinking about trying to promote that more to our clients. And then they get the benefit if one of their debtors falls over and then also, naturally, we do as well. So it's something we're thinking about.

Next one. Please elaborate on intangible assets. Why is amortization charge lower?

My best response to that is -- and I'm pretty sure it's right, is that when we acquired Classic a few years ago, there was goodwill and there was also a portion of customer relationships as part of the purchase price and goodwill is not amortized. It's just checked, revalued and adjusted if goodwill is lower. The customer relationships amortizes through time as the usefulness of the relationships tails off. So that is what that amortization is and it's falling because it's all being amortized away. I think this is the last half where that will appear and then NPAT and NPAT will be back to the same. Is that right, Steve? Do you have anything to add?

That's correct, James. It's fully amortized. It ended in October, so that we haven't been amortizing from November, December, we won't see an amortizing in the next second half.

Okay. So next question. Struggling to comprehend how RevRoof went from an $8 million exposure last period to $27 million this period, more than tripled. Even if it was blue chip credit, which it clearly wasn't, is this an inexplicable concentration risk and causing to question the broader credit decision made in the organization. Are you confident you have the right credit experience in the business?

The -- it was too much of a concentrated credit risk for one client, and we've addressed that for single bar exposure limit, now 1/3 of this exposure. And I can't talk about too much. I hope people understand that because we still want to get our money back. But I hope I made it clear earlier that there are lots of things that we could have done better, but we're fixing them. And I do think that we've got the right credit experience in the business. But if we find that there are gaps, then we'll look to close them. So it's a dynamic situation, and we're super focused on fixing our shortcomings.

Great. If rates stay high for longer, would you expect to be able to pass on the additional funding cost to the large and small clients?

It's a good question. It depends on our cost of funding. I think at this point, we'll probably just pass on the -- whatever our true cost of funding is. But there is -- because we now have full discretion over adjusting the Earlypay base rate, theoretically, if our cost of funds or cost of equity increases a lot, then we can pass on more to our clients. So the option is there. But at this point, we'll just keep, I guess, moving in line with [ BBSW. ]

Do you have a range expectation for the pricing of a new facility and the first loss required?

Yes. So well, actually, Paul, you there? Do you want to talk a little bit about this, it's you've been focusing on.

Yes, there's 2 things and just a slightly sort of qualify an answer you've provided before, James, about the sort of 1% pickup. The 1% pickup would be on the entire borrowing costs, our entire interest cost not just on the warehouse. So as you mentioned, there's clearly significant costs on the corporate bond and also the trade bond. But in terms of pricing, the facilities themselves, I don't -- pre-going to market, I really want to sort of comment on the pricing, that's going to be a function of what the banks sort of bid against each other, but we are looking for a meaningful reduction in the top line senior bank funding and also Mezz costs. In terms of the first loss, I think that's where we're going to see a fairly significant reduction, our first loss requirements to pick on invoice financing at or around 10% and with Mezz and changes in the structure, we think we can probably have that. So as James mentioned before, there's a fair amount of first loss equity across all the structures that we think we can release and then reuse that equity to reduce overall gearing.

Thanks, Paul. Next one. You have mentioned that the core bond is very expensive, especially given rate rises squeezing margins. Are you looking at refinancing that bond what's your time frame? And is the bond callable early?

I'll get that quickly, Paul here. It is callable early and we pay just a little bit over par to do that. And we are looking to refinance it, probably as part of the refinancing to tie up our cost of funding generally.

Right. And how confident are we with the landlords assigning the leases?

We have no reason to think that they wouldn't.

Next one, very simply, how did you allow the size of the exposure to RevRoof to build up given the excessive exposure to a single client.

It's poor risk management, I would say, to be honest, and we've addressed that. I think there's no point, I guess, sugar cutting, it was bad, and there were some things that we did wrong, but we are addressing them as best we can -- is right.

When do you expect to resume paying dividends?

Good question. It depends. It depends how the refinancing goes, how much equity comes out of that and to quickly be returned to profitability, and it depends on the type of capital structure we want to have going forward. So they're the factors that would influence the decision, but I can't say when exactly.

Okay. In terms of your pro forma presentation of results, have you presented this under the assumption of the lower maximum exposure for a single client and operational changes?

I would say yes. Yes. That pro forma, all we do to get from the reported to the pro forma -- it's take out the interest expense that RevRoof that we had to pay on behalf because we had the RevRoof possession. We take out the interest income and the noninterest income. And then we take out the funds in use from the balance. That's the things that we changed. So outside of that, we haven't made any other adjustments. But I think generally, we're working towards that single borrower exposure limit and assuming those operational changes and they're going to continue to come through.

Thanks, James. Can you advise when RevRoof became a client of EPY.

I want to say October -- September, October 2021.

October '21, yes.

Okay. And was the Board aware of the extent of RevRoof's exposure, how were they comfortable with that size exposure?

Yes, they were aware and it was discussed. And collectively, it was accepted to be client at the time but with the power of fine sight and Tom it's probably a poor decision.

Okay. Well, that rounds up all the questions today. I'll pass back to you, James, for any final remarks.

Thanks, Grace. I don't have a whole lot more to say apart from the severity of the situation we totally appreciate and we're working so hard to remedy the failings and to make sure that we have a really robust business. And one of the most disappointing things here is just the -- I guess we want to earn back the confidence of investors because clearly, this is something that is very unpleasant for everyone. So that's as a management team and a Board, that's an important part. So confident that we're on the right track, and we'll come out of this with stronger foundations. We just now have to do the work. Thank you, everyone, for your interest in Earlypay and for joining today.

That concludes today's session. Thanks, everyone, and enjoy your weekend. Goodbye.

Thank you Grace.