In 1937 Leon Murstein, a young Polish immigrant, paid $10 for one of the first taxi licenses in New York City. He drove himself hard and used every penny he could find to buy other licenses. By the 1970s he had 150 of the 11,787 valuable "medallions," and decided it was time to start selling. His best prospects: drivers who wanted to be their own bosses.
Alas, no bank would lend to would-be cabbies -- mostly new immigrants speaking broken English -- with no credit history and few assets.
But Murstein had been there himself. He understood what Bank of America's founder, Amadeo Giannini, realized over 90 years ago, when Giannini lent money to Italian immigrants around San Francisco: Though these immigrants lacked formal creditworthiness, their ambition was collateral enough. Murstein decided to finance drivers who wanted to become owners.
Two decades later, publicly traded Medallion Financial has lent $700 million to cab drivers in New York and in other cities across the country. "These guys have a terrific work ethic," says 34-year-old Medallion President Andrew Murstein, the third generation to run the company. "They'll do whatever it takes, working 6 days a week, 12 hours a day." Medallion says it has never lost a dime on any of its taxi loans. If a customer falls behind in his payments, Medallion can simply repossess the license -- by prying the metal plate right off the hood of the cab.
The political clout of drivers and owners is a powerful factor behind the good credit record on taxi loans: In the 60 years that taxi medallions have been issued, New York City has increased the number of licensed cabs only once, by 400, even though the population and traffic have expanded manyfold.
With this artificially limited supply, a New York City taxi medallion sells for about $250,000. On average, they've appreciated 18% a year, which means that the collateral behind the loans increases at a fairly steady rate. Prices slipped a bit during the recent battle between cabbies and Mayor Rudolph Giuliani when he tried to crack down on reckless taxi drivers, but as such things do, this storm will soon blow over.
Here's how the business works. A driver typically puts up about 30%
of the purchase price, with Medallion financing the rest -- say $180,000 -- at 9.5% interest over 15 years. Because the licenses have risen in value so quickly, borrowers build equity and generally refinance with Medallion within three years.
Last year Medallion earned $11 million on investment income of $23 million, a 48% net margin. This year it should earn $18 million on investment income of $37 million. "In niches there are riches," explains Murstein, reciting his grandfather's credo.
Medallion doesn't pay corporate income taxes because it has been structured since its 1996 public offering as a regulated investment company -- like a REIT, it pays out 90% of its income to shareholders.
With a 20% market share, Medallion doesn't have the business to itself. Big banks pose little threat since they tend to pass on small-
scale, labor-intensive loans. The company's stiffest competitors are local credit unions and other small finance firms -- and Medallion has bought eight of them since its IPO. The company has tight relationships with the 25 brokers authorized to deal in New York City taxi medallions.
Among cabbies, Medallion is considered the fairest, most flexible lender.
Murstein has also sought out another immigrant-dominated industry spurned by major banks -- dry cleaners and laundromats. Like taxis, they generate steady cash flow and are run by people willing to work as hard as it takes. Medallion has some $50 million in outstanding loans in the sector. Loans in this and other small business areas have grown from just a few percent to 30% of Medallion's portfolio in the past few years. Given New York City's large immigrant population and its deep penetration in the small business sector, the opportunities are huge.
"There's a dry cleaner on nearly every block in New York, and all need financing at some point," says Murstein. With so little competition, he can charge a colossal 13% on average while borrowing at 6.6%. The loss rate: just 0.3%.
Medallion is also tapping a new and lucrative source of income: taxi-
top advertising. Only about 3,800 of New York City's 12,000 cabs have a rooftop display, and Medallion has 3,500 of them under contract, charging advertisers $200 a month per cab and giving about a quarter of that to the medallion owners. Last year advertising brought in $3 million; so far this year that figure has tripled.
Murstein and his dad together hold about 20% of the company and are each worth about $35 million. At 20 times earnings, Medallion's thinly traded Nasdaq stock has slipped more than 10% from its recent high.
Analysts expect earnings to grow by 23% a year. The company is placed to profit from a niche that can only grow with the fast-growing immigrant population.