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GFC night terrors revived to haunt the FlexiGroup share price

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Credit: Caio Schiavo

Reassurances from FlexiGroup Limited (ASX: FXL) failed to stop the stock from tumbling below $1 for the first time since the GFC.

The FlexiGroup share price crashed 8.1% to 96 cents in after lunch trade – the lowest since 2009. In contrast, the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) took a 6.9% flogging.

Other stocks in the consumer credit and buy-now pay-later sector are also taking a beating. The Afterpay Ltd (ASX: APT) share price tanked 7% to $21.62 and the Zip Co Ltd (ASX: Z1P) share price lost 3.9% to $1.34 at the time of writing.

Plenty of available debt if you can get it

Flexigroup shareholders might be somewhat surprised the stock isn’t holding up better after management said in its ASX statement that it was “well funded through a diverse range of sources with significant headroom for growth”.

The COVID-19 pandemic is putting strain on the cash position of many companies and there are worries that a significant number of them could run out of cash to fund operations.

But FlexiGroup says it has over $800 million it can draw on to fund its business and growth ambitions.

Funding from multiple sources

The group highlighted its $674 million undrawn wholesale funding facilities provided by a range of major domestic and international banks.

It can also tap $103 million in undrawn corporate debt facilities that the group says is unique to the non-bank sector.

“In addition, flexigroup is pleased to announce today that it has secured an increase of $75 million of committed wholesale funding with a major domestic bank with the facility extended for a further two years,” said Flexigroup.

Why investors are still panicking

This all sounds like good news, so why the negative share price reaction? The issue is that the global coronavirus outbreak is starting to impact on credit markets. Investors in Australia and the US worry that the banks can’t get enough liquidity – let alone an emerging ASX small cap like FlexiGroup.

This worry prompted both the Reserve Bank of Australia and the US Federal Reserve to pump billions into the financial system to keep the banks growing.

Even then, credit markets are still in distress as investors believe there might not be enough cash floating around for all companies.

Foolish takeaway

While this all sounds great, it doesn’t remove counterparty risks – at least not enough.

By not revealing which local and international banks are providing the funding, investors are left to imagine the worst. Who are these banks? Do they really have the liquidity to fund their lending agreements?

The GFC taught us that some funding agreements aren’t worth the paper they are printed on during times of severe credit distress.

Call me an optimist but I don’t think the coronavirus-induced bear market is as bad as the GFC as the crisis doesn’t threaten the fabric of the global financial system, but there’s a lot we still don’t know about the virus.

The path of least resistance is always down in a market panic.

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Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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