Community Choice enters facility to support longer-term lending efforts

By Paul Deckelman

New York, Aug. 20 – Community Choice Financial Inc. ended the 2014 second quarter with nearly $125 million of cash and equivalents on its balance sheet – as well as a new credit facility that will let the Dublin, Ohio-based alternative financial services provider expand its lending activities from its traditional small, short-term loans to more substantial, medium-term loans of up to three years.

According to the company’s most recent 10-Q report filed with the Securities and Exchange Commission, as of the end of the quarter on June 30, the company’s balance sheet showed total debt of $494.5 million, up from $465.89 million at the end of the 2013 fiscal year and fourth quarter on Dec. 31, 2013.

The vast bulk of the debt consisted of two issues of outstanding junk bonds: its $395 million of senior secured notes due 2019 that the company had sold in April 2011 and $25 million of 12¾% senior secured notes due 2020 that were sold in July 2012. The outstanding amounts on those bonds did not change between Dec. 31, 2013 and June 30.

Credit line expands business

A sizable portion of the overall debt increase was attributable to the company entering into a new $17.25 million facility just before the end of the quarter to support its push into making larger and longer-term installment loans in addition to the traditional small “payday” loans that have long formed much of its lending activity.

The company’s chief financial officer, Michael J. Durbin, told analysts on the company’s Wednesday conference call following the release of the quarterly results that the new facility “is structured really as a two-year bullet note, so there’s no principal amortization. It’s put in place to provide liquidity for the expansion of that installment paper.”

During the question-and-answer portion of the call that followed Durbin’s presentation and that of the company’s chief executive officer, William E. “Ted” Saunders, an analyst inquired about future borrowings to support the growing installment-lending program.

Durbin replied that “I am aware of, and we are in dialogue regarding, potential facilities that feel a little bit more like a traditional securitization. So I think that as that portfolio continues to grow and lends itself to asset-specific financing, we will tap that as a source of liquidity. We think that continuing to expand that business line is an important channel of value-creation for all of our stakeholders, and we know that there is efficient liquidity out there to support that expansion. So we’ll continue to look at that.”

In the meantime, he said that the $17.25 million facility that the company put in place “has some flex language in it that allows that facility to increase, and it has a two-year maturity, with no amortization between now and maturity.”

Saunders told the analysts that “from where I sit, clearly a balance sheet has to have the liquidity in order to achieve the growth that we’d like to do.”

He said that “we need to be poised for the future, particularly if there is a regulatory change” in terms of more state banking regulators getting on board and allowing Community Choice to make the installment loans in addition to the short-term payday loans.

“As you talk about where there was a meaningful migration of short-term customers to a longer term, that is a liquidity need that’s very discernible – i.e., making two-year, 12-month or even 36-month loans has a much different cash cycle than making two-week loans to people.”

Saunders noted that his company is not the only short-term lender looking to make somewhat longer-term loans.

“Most importantly, we’re not alone in doing it, and I think if you look at the nature of the [lending] players that are providing these types of facilities, as they start percolating up into the public sphere, it’s probably a testament of what we’re doing and what others are doing, from an investment thesis standpoint,” he said.

He went on to explain that “the type of people who are making these capital facilities available have the ability to do some pretty good [due] diligence, to do some analytics and to make sure the path that myself and my competitors are on – in terms of looking at the marketplace and looking at the consumers and looking at the performance – are pretty good ideas.

“So I think it’s good in a number of ways that we are on this path. I think it’s good for the industry that we see these sophisticated providers supporting these growth opportunities as well.”

Receivables portfolio grows

Besides the bonds and the new $17.25 million two-year subsidiary note, the company’s capital structure as of June 30 also included an existing $8.1 million facility backed by the same kind of subsidiary note.

There was also $36.6 million of other credit facility debt. That was up from $25 million at the year’s end and now classified as current rather than non-current because it comes due in May 2015.

The $124.83 million of balance-sheet cash and equivalents was up from $90.31 million at Dec. 31, 2013, and restricted cash grew to $3.15 million from $1.41 million.

Durbin further noted that the company’s portfolio of net receivables was $170.5 million, versus the fiscal year-end level of $165.3 million. It was well up from $125.9 million of receivables in the year-ago second period, representing growth of more than 35%.

Saunders attributed the latter improvement to the impact of the company’s growing business in unsecured medium-term loans of up to $5,000 with maturities from three months to three years and its secured loan business providing loans against collateral of up to $5,000 with maturities of between one month and 24 months, as opposed to the more traditional short-term unsecured loans of up to $1,000 under which the borrower provides a post-dated check or a pre-authorized bank account debit on his or her next payday.

“When you think about our medium-term and secured receivables portfolio growing north of $50 million in 12 months, that’s pretty good growth,” he declared.

He said that going forward, the company is “going to experiment with different pockets of customers and geographies and products. We’re going to have some things that turn out great [and] some things that don’t turn out so great, but as you can see in the numbers, the strategy is working and working very well.”

Loan demand creates opportunity

Saunders said that the market for such small loans of between $100 and $5,000 with durations of three years or under “is certainly robust,” with a potential target audience of consumers looking for credit and financial services within those parameters “at one of the peaks we’ve seen in the time that I’ve followed the financial services industry in general.”

But he noted the changes in the alternative, or non-bank, consumer financial services business over the last several years.

“If you take a step back and remember what the Card Act [i.e., the federal Credit Card Accountability Responsibility and Disclosure Act of 2009], Dodd-Frank and other regulatory change has done to traditional bank lending, to unsecured lending – the Households and Beneficials are now effectively gone, and the sub-prime credit card [business has been] greatly impaired,” he said.

“The demand for credit in our country has not gone down, but the breadth and availability of that consumer credit has, and that’s created a wonderful opportunity for us to continue to grow.”

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