Post Crisis Financing Options for the Payday Industry

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Presentation from the 2010 CFSA Conference made by Decosimo's Mike Costello on post crisis financing options for businesses in the payday advance industry.

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Post Crisis Financing Options for the Payday Industry

  1. 1. TRUSTED. EXPERIENCED. CONNECTED.MEMBER FINRA, SIPC Post-Crisis Financing Options Mike Costello, CPA•ABV•CFF, ASA, CFE Principal, Joseph Decosimo and Company, PLLC Managing Principal, Decosimo Corporate Finance, LLC
  2. 2. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC About Decosimo• Accounting firm with nearly 150 CPAs• Member of CFSA• Headquartered in Chattanooga, TN• Offices in Cincinnati, OH; Atlanta and Dalton, GA; Grand Cayman, USVI; Memphis, Nashville, and Knoxville, TN• Expertise in multiple industries
  3. 3. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC About DAS• A practice of Decosimo CPA firm• Provides business valuation, litigation support, and transaction advisory services• More than 35 years of transaction experience• Industry expertise includes payday lending and others• Professionals hold ASA, CBA, and/or ABV credentials
  4. 4. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC About DCF, LLC• Investment bank, member FINRA, SIPC• Provides sell-side and buy-side advisory, sources debt and equity financing, and performs fairness opinions• Formalization of corporate finance activities Decosimo firm has performed for more than 35 years• Have completed hundreds of transactions during our history and more than $15 billion in total transaction value in the past several years• Have raised capital for several payday industry leaders
  5. 5. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Presentation Topics1. Basics of value and financing in the payday industry2. How the financial meltdown affected financing3. How you can increase your chances of getting financing4. Different financing options available and financing case studies5. Head to tee-off on #1, the airport, and/or the bar
  6. 6. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Value and Financing Basics• Value affects your ability to finance• Why are banks unwilling to lend in general? 1. Values have decreased 2. Overall reduction in willingness to accept risk
  7. 7. TRUSTED. EXPERIENCED. CONNECTED.MEMBER FINRA, SIPC Increasing ValueSenior Debt Sub Debt Equity • If percentage of value various 25% sources are willing to lend is 50% fixed… 25% • Can only obtain more financing by increasing value 25% • Increasing value can also make 50% a less risky investment and increase the percentage sources 25% are willing to lend
  8. 8. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC What Has Happened to Value?Value is affected by: 1. The money you make (earnings and growth) 2. The risk you take (the riskiness of your industry and company)
  9. 9. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Earnings and Growth• Earnings were down significantly during late 2008, but recovered during the latter half of 2009• Public companies show similar earnings measures: Payday Industry Public Company Earnings Operating Revenue Gross Profit EBITDA Net Income 140% % Change in LTM Figures Since 9/04 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 LTM Ending
  10. 10. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Economic Factors• Economists expect unemployment to remain high through 2012 – Less people qualify for payday products, those that do have a higher chance of default Unemployment Rate Historical Philly Survey WSJ FOMC Range FOMC Central Tendency 11% 10% Unemployment Rate 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* Long Run* Year
  11. 11. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Economic Factors• Economists expect economic recovery to be slow – Real GDP growth expected to be moderate through 2012; FOMC lowered long-run expectation Real Gross Domestic Product Growth Historical Philly Survey WSJ Survey FOMC Range FOMC Central Tendency 6% 5% 4% 3% % Change 2% 1% 0% -1% -2% -3% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* Long Run* Year
  12. 12. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Risk• The industry has suffered extensively from real and perceived increases in risk, mostly regulatory• There has been some recovery due to decreased regulatory pressure Payday Loan Industry Capitalization Rates as Implied by MVIC/EBITDA Mean Median 20% Cap Rate (1 / MVIC to EBITDA) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Nov-05 Nov-06 Nov-07 Nov-08 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 May-05 May-06 May-07 May-08 May-09 Jan-06 Jan-07 Jan-08 Jan-09 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Quarter
  13. 13. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Capital• Many companies have attempted to “clean up” their balance sheets• Public companies have significantly increased stock repurchases, appear to be increasing debt repurchasing Public Company Financing Cash Flows Issuance of Debt Issuance of Stock Repayment of Debt Repurchase of Stock 700% 600% % Change Since 9/04 500% 400% 300% 200% 100% 0% -100% Trailing Twelve Months Ended
  14. 14. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Affect on Value• Values are down = Less room for financing Payday Lending Portfolio Performance Payday Portfolio ^DJI ^GSPC ^IXIC 20% 10% 0% -10% % Change -20% -30% -40% -50% -60% Jun-07 Jun-08 Jun-09 Dec-06 Dec-07 Dec-08 Dec-09 Feb-07 Feb-08 Feb-09 Oct-07 Oct-08 Oct-09 Aug-07 Aug-08 Aug-09 Apr-07 Apr-08 Month Apr-09
  15. 15. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Frozen Credit Markets• Flight to quality – ultra-sensitive to risk• Banks are unwilling to lend, or• Banks will lend a smaller portion of value
  16. 16. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Frozen Payday Credit• The industry is perceived as risky: – Regulatory risk – “Reputational” risk• Banks exiting industry• The “prettiest” companies can still get financing• Smaller lenders left no option• Negotiation processes now driven by credit officers
  17. 17. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Frozen Payday Credit• Industry attractiveness appears to be improving: – Earnings and growth getting stronger – Regulatory risk is reducing• Credit markets are in the process of thawing
  18. 18. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Obtaining Financing• Earnings and Growth: – Consistent profitability – Strong, expandable growth model – Maintain a strong base of mature stores• Reduce Risk: – Diversify your regulatory risk by operating in multiple states – Track record of minimal bad debt expenses – Have polished, well-documented compliance and operations procedures in place – Maintain a pristine balance sheet – do what you can to de-lever
  19. 19. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Where Can You Find Financing?• Debt: – Mezzanine debt – Private placement• Equity: – Private equity group – Private placement – Recapitalization – Strategic sale
  20. 20. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Traditional Debt• Senior lenders have exited the payday credit market• Only a few desire to provide credit for the best payday companies• A few expressed interest in funding money service business• Expect strict covenants, short terms, and higher rates
  21. 21. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Traditional Debt• Medium term notes and long-term debt: – Banks no longer want to commit longer than a few years• Only the “prettiest”
  22. 22. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Traditional Debt – Case StudyLarge private company with minimal use of debt• Successfully renegotiated credit facilities with rest of bank group and new bank• Still favorable terms with slightly higher rate, but didn’t get as much as would have liked, shorter term than usual (2 year)• Banks wanted changes• Successfully amended in December 2009 after strong year, increased credit limit, extended term• Also obtained seasonal credit in the beginning of 2010
  23. 23. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Debt Alternative – Mezzanine• Advantages: – Typically have higher risk profiles – Can fill 0.5× to 2× EBITDA gap – Growing market of providers – many options – Less sensitive to “reputational risk”• Disadvantages: – Typically much higher interest rates – 15% up to 20%+ – Sometimes want an “equity kicker” or conversion option
  24. 24. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Debt Alternative – Private Placement• Advantages: – Can have very high risk tolerance – Can access investors that aren’t concerned with “reputational risk” – Can have better control over the terms – Can fill large value gaps• Disadvantages: – Tough to access – Requires a lot of leg work – Typically only available to larger companies
  25. 25. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Debt Private Placement – Case StudyDollar Financial recently raised $600 million through a private debt placement• Intended to raise $350 million to help pay off this debt• Offering was oversubscribed: – Raised $600 million, paid down term notes, other debt, and financed acquisition of Dealers’ Financial Services• 10.375% interest rate, fairly favorable terms, 6 year term
  26. 26. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Another Debt Private PlacementPrivate company, significant amount of debt, large credit facility due 2011• Negotiations were unsuccessful with banks• Pursued private equity capital• Successfully raised debt financing through private placement
  27. 27. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Traditional Equity Financing• Advantages: – Don’t have to deal with banks, terms, etc. – Don’t have to pay interest• Disadvantages: – You take the risk – You may not have the money
  28. 28. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Private Equity Financing• Advantages: – PEGs have compiled funds from institutional investors and wealthy individuals with diversified portfolios – and high risk tolerance for their private equity investment – Transfer some of the equity risk to the PEG, can get some cash out of the business• Disadvantages: – Typically will only invest controlling interest amounts – Dilution of ownership – Sell their interests in 4-7 years to another PEG, current owners, a competitor, or the public (an IPO)
  29. 29. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC PEGs and Payday Lending• During the crisis, PEGs have been fairly hands off• PEGs have not invested a significant portion of raised capital due to the financial crisis• They will be pressured to “put money to work” very quickly in the next few years Private Equity “Overhang” Source: Pitchbook Data, Inc.
  30. 30. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Equity Private Placements• Advantages: – Can have very high risk tolerance – Can access investors that aren’t concerned with “reputational risk” – Can sell any percentage of the company• Disadvantages: – Tough to access – Requires a lot of leg work – Typically only available to larger companies
  31. 31. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Recapitalizations• Advantages: – Current owners typically compensated for a large portion of ownership – Sponsor brings in debt financing from their relationships• Disadvantages: – Usually give up control of the company – Often depends heavily upon obtaining senior bank financing
  32. 32. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Strategic Sales• Advantages: – Typically get full liquidity for interests – Sometimes able to get attractive values• Disadvantages: – Most likely don’t continue with the business – Most strategic buyers won’t pay attractive values
  33. 33. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC Conclusion• It is a rough financing market, but seems to be improving• Do what you can to increase your value and reduce your risk• Consider creative, less-traditional methods of financing• Seek advice from professionals
  34. 34. TRUSTED. EXPERIENCED. CONNECTED. MEMBER FINRA, SIPC“WHEN WE NEEDED A BUSINESS VALUATION, WE LOOKED TO DECOSIMOBECAUSE OF THEIR ALTERNATIVE FINANCE INDUSTRY KNOWLEDGE ANDADVANCED VALUATION CREDENTIALS.”- ROGER DEAN, CFO “DECOSIMO IS THE ACCOUNTING FIRM FOR THE ALTERNATIVE FINANCE INDUSTRY.” - LYNN DEVAULT, PRESIDENT“WE CHOSE THE DECOSIMO CPA FIRM BECAUSE THEIR CPAs ANDADVISORS HAVE THE MOST EXPERIENCE SERVING OUR INDUSTRY.”-BEN PARAMORE, CFO

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