Description

Overview

This one is for smaller funds that can trade 144a bonds.  I’ll purposefully somewhat vague on specifics and point you to the company’s website to obtain further information. 

https://www.acecsi.com/DebtRpts/Registration/InvestorReg.cfm

Company Description

Ace Cash Express (privately-owned) is a traditional payday lender.  Like most payday lenders, it was born as a check-casher in the 90s and was subsequently purchased by JLL Partners in 2006.  I won’t spend much time talking about the CFPB and the regulatory risk that’s out there – I think it has been well-covered by other VIC posters and the media generally.  For example, please see the ENVA post by GCA in February.   

Thesis

What’s interesting about AACE is it has a simple, clean capital structure, a lot of cash, and a little loan book.  If things go horribly wrong with the CFPB, my guess is you get 1.5-2 years of coupons (16.5-22%) and liquidate to recover for 50-60% and get 66.5-82% vs. 40-45% trading price today.  Notably, the sponsors purchased $66.2 mm of the Notes (incorporated into my $266 mm below) at some point after December. 

Balance Sheet

·         Assets

o   Cash: ~$100 mm

o   Loan Book: ~$100 mm

·         Debt

o   Zero drawn on $30 mm revolver (due in October 2016)

o   $266 mm of bonds outstanding

Financials/Other

·         Revenue: ~$550 mm

o   About 60% is payday and similar loan fees

o   Remaining ~40% is other stuff like check cashing, prepaid debit cards, money transfers, etc.

·         EBITDA: ~$95 mm

·         CapEX: ~$15 mm

·         ~1400 stores on its way to 1000

·         30% exposure to Texas.  14% to California

What’s Going to Happen?

Let’s say the worst case happens: the CFPB comes out with rules in the near-term, and that the rules are very harsh (probably 2/3s of payday-related revenue goes away or is extremely challenged).  To start with, the actual implementation of the rules will take 1-2 years, so that probably gives you run-way to collect the 1.5-2 years of coupons described above.  Further, you’re probably generating LFCF during that period, but let’s ignore that. 

So we get to the end of that 1.5-2 year period, the business crashes, and we bondholders take control of the company.  We have two options: 1) try to run the business on a significantly less profitable basis or 2) take our cash, liquidate the book, and go home. 

1)      Run the business

a.       Current EBITDA is ~$95 mm.  It’s not exactly clear what is truly fixed and variable if the CFPB comes out super harsh.  For example, almost all of the company store leases have “outs” if there are regulatory changes that make business impossible, so a fixed cost could become highly variable quickly.  Let’s say EBITDA goes down by ~50% to $45 mm and capex similarly goes down to $7 mm – so EBITDA-X of ~$38 mm. 

b.      Recovery math

                                                               i.      Cash: $70 mm (I give credit for ~$70 mm of cash vs. the $100 mm outstanding because in a run-rate scenario, cash will get tied up in the business itself, but I’m NOT giving the benefit of cash build over the 1-2 year implementation period)

                                                             ii.      EBITDA-X multiple of 5x on $38 mm = ~$190 mm

                                                            iii.      $70mm + $190 =  $260 mm gets you nearly par plus the coupons, which is good for another 16.5-22%. 

2)      Liquidate the business

a.       Cash: $100 mm (again, assuming no cash build, but since liquidating you’ll ultimately get all the cash

b.      Loan book: Assume the $100 mm loan book worth 50% = $50 mm

c.       $100 mm + $50 mm = $150 mm gets you 55% plus another 16.5-22% from coupons

 Happy to discuss further in the comments, but again, need to be vague on the specifics.  

Catalyst

CFPB regulations