3. Bad Debts
Companies generally don’t give the details of how
they compute bad debts
There are, however, typical considerations
Historical rates of charge-offs and recoveries (mostly the
company’s own, but industry-wide numbers may also be part
of the process)
Transaction volume
Age of the stores
Details of state law
Economic conditions
4. Measuring the Allowance
Most common: income statement measure
Numerator: bad debt expense for the year
Denominator: revenue from the relevant type of loan
Also sometimes seen: balance statement measure
Numerator: amount in the bad debt reserve
Denominator: loans receivable
The allowance is an estimate of the entire portfolio,
not a judgment about any one loan
DLLR is an exception, recording increases to the reserve when
a default actually occurs
5. Special Cases
Texas (CSO) structure
The allowance is typically classified as a contingent liability
under the letter of credit
This does not affect the amount reserved, only the presentation
Pawn loans
No reserve is accrued
If the customer does not redeem the item, the transaction was
really not a loan, but a purchase of inventory, and the books
are adjusted to reflect this
The above does not apply to title loans—those have a bad debt
reserve.
6. Values of the Ratios
AEA Advance America
Essentially pure payday-loan
First 9 months 2011: 16.7% (up from 16.2%)
Third Quarter 2011: 20.9% (down from 21.6%)
Appears to be seasonal
Full-year values:
2010, 17.4%
2009, 19.2%
2008, 20.1%
2007, 19.8% (not comparable before that)
7. Values of the Ratios
CSH Cash America
Three-fifths of revenue is pawn
Consumer loans (both payday and installment)
2010:37.2%
2009: 35.2%
2008: 38.6%
On balance-sheet basis, more reserves for payday (20.8% of
receivables) than for installment (16.3% of receivables)
8. Values of the Ratios
DLLR Dollar Financial (renamed to DFC Global)
Majority of revenue (56.4%) is payday; only installment loans are in a
military program (also do pawn, check cashing, and gold buying)
3rd Quarter 2011: 20.2%, up from 15.2%
Annual (July–June):
2010–2011:17.2%
2009–2010: 14.4%
2008–2009: 19.5%
2007–2008: 20.7%
2006–2007: 20.7%
Another interesting note: their non-performing loans went from
22.6% to 26.2% of receivables from 2010-Sept to 2011-Sept, which
drove the expense up
Their reports focus more on the balance sheet ratio
9. Values of the Ratios
EZPW EZCorp
October–September fiscal year; 80% pawn
Like CSH, has a “signature loans” category that covers both
payday and installment, but is mostly payday
2011:24.2%
2010: 22.8%
2009: 25.2%
Separate category for auto title loans
2011: 11.2%
2010: 15.4%
2009: 10.6%
Varies in exactly the opposite pattern
10. Values of the Ratios
FCFS First Cash Financial
12% payday and 2‰ installment, the rest is pawn
2010: 25.4%
2009: 26.0%
2008: 28.2%
9 Months 2011: 30.2%, down from 32.4%
3rd Quarter 2011: 23.1%, down from 26.5%
11. Values of the Ratios
QCCO QC Holdings
Payday and installment are again not distinguished in the
reserve, about 2:1 payday with a tiny bit of check cashing and
buy here/pay here
2010: 22.5%
2009: 23.0%
2008: 25.3%
2007: 24.0%
2006: 21.1%
12. Values of the Ratios
WRLD World Acceptance
Strictly installment loans, and services (e. g. insurance)
ancillary to installment lending
April–March fiscal year
2010: 22.6%
2009: 24.1%
2008: 25.8%
2007: 23.1%
2006: 21.0%
April–September 2011: 30.2%, down from 32.4%
3rd quarter 2011: 23.1%, down from 26.5%
14. Comparative Capital Structures
100%
90%
80%
70% Common Equity
60% Derivatives
50% Subordinated Debt
40% Senior Notes
30% Other Short-term Debt
20% Revolver
10% Accruals
0%
15. Advance America
$270 million revolver available
Company may request increase to $365 million with covenants
$79.1 million outstanding, plus $6.5 million in letters
of credit (related to Texas)
Premium over LIBOR is from 2½ to 3¼ points,
currently at 2½
Determined based on leverage
16. Cash America
$280 million line of credit, 80% outstanding
LIBOR premium is from 2 to 3¼
Currentlyset at 2½
Method of computing the premium is also not specified
Commitment fee is 25–50 basis points (current 38)
Arrangement also includes a term loan of $50
million, floating interest at 3½ points over LIBOR
Fixed-rate debt:
$136.7 million straight debt, rates from 6.09% to 7.26% and
maturities 2012–2021
$106.3 million convertible debt, at 5.25%, matures 2029
17. DFC Global f/k/a Dollar Financial
Information is as of December 2011
Global revolver of $200 million
Maximum of $75 million in US$; may also be tapped in C$, £, or €
Interest at 4 points over the LIBOR or equivalent rate for the relevant
currency
May be capped at a percentage of cash and receivables
$154.3 million outstanding
Scandinavian facilities based on an acquisition
SEK 240 million in term loans at current rate of 4.68%
SEK 20 million out of 85 million in an overdraft facility currently at
4.78%
The above are lender’s cost (3.08%) plus a premium.
Also, €16 million out of 17.5 million at Euribor plus 1.95 points
(current 2.59%)
18. DFC Global f/k/a Dollar Financial cont.
Fixed-rate debt is in three issues
$600 million of 10.375% notes due in 2016 (issued 2009 at
99.5)
$40.7 million of 2.875% convertible notes due in 2027
$90.9 million of 3% convertible notes due in 2028
Derivatives in place:
US$/C$ interest rates, paying a fixed rate on a notional C$322
million and receiving a floating rate on a notional US$280
million (down $43.5 million in fair value)
Collars on 4,500 ozt of gold (near zero fair value)
19. EZCorp
Information as of December 2011
Revolver is for $175 million, of which $40.5 million
was borrowed and $5 million tied up in Texas letters
of credit
Premium to LIBOR is 2 to 2¾ points (current 2½)
Commitment fee is 37½ to 50 bp (current 50)
Exact premium is decided by leverage
21. QC Holdings
Term loan is for $32 million
Premium over LIBOR is 4¼ points
Must be prepaid with at least 50% of available cash (75% if they are
at more than 1:1 leverage)
Matures in 2014
Revolver for up to $27 million
Rate varies from 3¼ to 4¼ points over LIBOR
Commitment fee is 37½ to 62½ bp
Exact premiums depend on leverage
$3 million of subordinated debt
Chairman/CEO holds $2½ million, an outside shareholder has the
rest
12% cash interest payment plus 4% in-kind interest (bunny bonds)
Matures in 2015, may be prepaid after the other loans are covered
22. World Acceptance
Information is as of December 2011
Revolver is up to $300 million, with $279 million
borrowed
Interest rate is LIBOR plus 3 points, but a minimum of 4%
(which currently controls)
Commitment fee is 40 bp
$20 million is hedged to a synthetic quasi-fixed rate of 5.4%
Subordinated note still has decent backing to it
Line of credit, not revolving
LIBOR plus 4⅞ points
$70 million maximum ($50 million out), decreasing $5 million
per year
23. And on the equity market…
WALL STREET AND THE PAYDAY COMPANIES
27. Multiples (as of 24 February 2012)
AEA CSFS CSH DLLR EZPW FCFS QCCO WRLD
EV to 1.14 0.59 1.19 1.69 1.76 2.34 0.51 2.41
Revenue ⑥ ⑦ ⑤ ④ ③ ② ⑧ ①
EV to 5.75 4.73 6.15 5.58 7.59 10.23 3.76 7.27
EBITDA ⑥ ⑦ ④ ② ① ⑧ ③
P/E 11.25 16.08 10.93 14.02 11.70 17.51 6.66 10.41
(Trail) ⑤ ② ⑥ ③ ④ ① ⑧ ⑦
Price to 2.48 1.28 1.50 1.84 2.24 4.09 0.80 2.19
Book ② ⑦ ⑥ ⑤ ③ ① ⑧ ④
P/E (Y 7.70 7.94 — — — — — —
+1)
28. Contact Us
Mike Costello Tom Decosimo
CPA•ABV, ASA, CFE, CFF CPA•ABV, ASA
Principal Principal
mikecostello@decosimo.com tomdecosimo@decosimo.com
423-756-7100 423-756-7100
29. About Decosimo
Top 100 Regional CPA firm with approximately 300 professionals and staff
Office Locations:
Huntsville, Alabama
Chattanooga, Knoxville, Memphis and Nashville, Tennessee
Cincinnati, Ohio
Atlanta and Dalton, Georgia
Grand Cayman
Independent firm associated with Moore Stephens International Limited
Association comprised of 314 independent CPA firms with 638 office locations across 97 countries
Allows us to provide resources comparable to Big Four firms
CPA of choice for the pioneers in consumer finance with a 40 year history of serving payday
cash advance providers, rent-to-own operators, title loan providers, pawn shops and consumer
loan providers
Consumer finance services include:
Business advisory including due diligence and business valuation
Tax consulting and compliance
Assurance and accounting
www.decosimo.com/consumerfinance
30. About Decosimo Advisory Services
Decosimo Advisory Services is a practice of the regional accounting firm Decosimo providing
business valuation, litigation support, and transaction advisory services to
businesses, business owners and their advisors. These services have been an integral part of the
Decosimo firm since its founding in 1971.
Our professionals have a diverse array of credentials in a variety of fields:
Accredited in Business Valuation
Accredited Senior Appraiser
Business Valuator Accredited for Litigation
Certified Business Appraiser
Certified Fraud Examiner
Certified Management Accountant
Certified Public Accountant
Fellow of the Healthcare Financial Management Association
With 40 years experience involving over $17 billion in transactions, Decosimo Advisory Services
has the strength, capacity and expertise to maximize value for the middle market.
www.decosimo.com/advisory
31. About Decosimo Corporate Finance
With a forty year history in hundreds of transactions, DCF helps business owners grow and maximize value
when selling their businesses, accessing capital for growth, or growing through acquisition. DCF is a broker/
dealer, member FINRA/SIPC
Sell-Side Advisory –
DCF’s clients concentrate on maximizing their value by doing what they do best – running their businesses. DCF seeks to maximize their
clients’ value by doing what they do best – conducting their disciplined sell-side process. DCF’s process is comprehensive, minimizes
disruption to daily operations, and is designed to maintain confidentiality and maximize value.
Buy-Side Advisory –
DCF’s full range of buy-side advisory includes acquisition searches, valuation analysis, due diligence, and merger and acquisition
financing. DCF brings its experience of over 40 years and $17 billion of transactions to each assignment.
Capital Sourcing –
Growing businesses require capital, and DCF understands the methods to help business owners obtain an optimal capital structure. DCF
utilizes a myriad of capital sources including banks, asset based lenders, equipment lessors, mezzanine lenders, equity funds, Regulation D
private offerings, and other private sources.
Fairness Opinions –
Corporate boards, special committees, trustees, shareholders, and other interested parties wishing to confirm the fairness of a particular
sale or transaction price require fairness opinions. DCF’s professionals have more than 40 years of transaction and valuation expertise, as
well as senior business valuation credentials.
www.dcf-llc.com