Payday lender DFC seeks to shift to loonie issue
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TORONTO — DFC Global Corp., which runs Money Mart payday lenders across North America, is seeking to replace U.S. dollar-denominated debt with Canadian and British currency securities as rising regulation squeezes revenue.
Randy Underwood, the Berwyn, Penn.-based company's chief financial officer, met with investors for lunch Monday at Toronto's King Edward Hotel to discuss the sale of $650 million of bonds to be issued in Canadian dollars and British pounds. The Canadian-dollar tranche will be eight-year notes and the amount has yet to be decided, according to person familiar with the proposal who wasn't authorized to comment on the record because the discussions are private.
DFC's results for the quarter ended Sept. 30 showed revenue declined in its biggest market, the U.K., where unsecured consumer lenders face a stricter regulatory regime. The company also posted revenue declines in the U.S., where it is taking "corrective action" after authorities there inspected its retail outlets. The only region to post revenue gains was the company's second-biggest market, Canada, where the regulatory regime has been unchanged since a 2007 overhaul.
"Their margins in Canada are much stronger than elsewhere, so they have a really solid niche in Canada," Igor Koyfman, a credit analyst at Standard & Poor's, said by phone from New York Monday. "There's less regulatory changes right now, and they can really generate some good cash flow right now."
DFC, which operates under the name of Money Mart in most of Canada and Insta Cheques in Quebec, will use the proceeds to refinance $600 million of 10.375 percent notes maturing in 2016, according to the person familiar with the transaction.
Phil Denning, a spokesman for DFC, didn't immediately return a call or e-mail message Monday requesting comment.
Similarly rated Canadian dollar bonds yielded 7.6 percent on Nov. 15, or 577 basis points more than equivalent-maturity government securities, according to the Bank of America Merrill Lynch Single-B Canada High Yield Index.
Payday loans are most often taken out by low-income people willing to pay high interest rates to avoid falling behind on their bills or to cover emergency expenses, according to studies commissioned by the Canadian government and the Canadian Payday Loan Association.
In February, Prince Edward Island joined seven other Canadian provinces in announcing new regulations on the practice. Ontario, Canada's most populous province, said in September it would review the maximum borrowing fee and the use of mobile applications to sell loans, and explore new ways to monitor the market.
In the U.K., the Financial Conduct Authority, formed in the wake of the credit crisis, will take over regulatory responsibilities for the consumer credit industry, including payday loans, in April 2014 and impose new rules on the industry, according to S&P. The rating company lowered DFC's rating to B from B+ Nov. 15, citing increased U.K. regulation.
Because the new rules will bring tougher underwriting standards, only allow customers to roll-over loans twice and restrict the number of times a payday lender can withdraw funds from a customer's account to repay a debt, DFC will likely see lower loan volumes and increased compliance costs, S&P said.
"Their financials have been a little weak lately, and I guess they're trying to get ahead of the curve on the changes that may occur on the regulatory front in the U.K.," said Nicholas Leach, who manages C$2.5 billion in high yield debt at CIBC Global Asset Management and attended the lunch at the King Edward. "One of their expectations is that the U.K. regulatory changes might look something similar to what they already experienced in Canada."
DFC's decision to refinance in Canadian dollars and British pounds was meant to match its liabilities with the currencies where its collect most of its revenue, and the focus for expansion is Spain and Poland, CIBC's Leach said.
While in Canada it's a criminal offense to charge more than 60 percent interest per year, in 2007 the Federal government gave provincial governments the power to regulate payday lenders, and exempted the companies from criminal prosecution so long as the loans were less than C$1,500 ($1,438) with a term of 62 days or less.
This allowed lenders like Money Mart to charge more than 60 percent annualized interest. In British Columbia, the company charges 600 percent annualized interest for loans arranged online and in Nova Scotia it charges 652 percent, according to its website. The provincial regulations prevent lenders from granting "rollovers," which allow borrowers to extend or renew loans at additional cost, thus limiting the amount of debt borrowers can take at the higher rates.
"At the end, they could charge higher interest rates under the law," said S&P's Koyfman. "In the U.K., the changes are more severe, and they're coming from the federal level. The thing that hurts most for these companies is when you implement these rollover limitations."
A 2006 government report, conducted the year before Canada overhauled its own payday loan regulations, said the loans were often given at "usurious" interest rates, the average size was C$280, and were most often taken out by men 18 to 34 years old with a household income of C$30,000 per year. The 2006 before- tax poverty line for a family of four in a city larger than 500,000 people was C$39,399, according to the Canadian Council on Social Development
Emergency cash is the most common reason people take out the loans, followed by "money to help with an unexpected expense" and to help avoid late charges on routine bills, according to an Environics Research Group study conducted in April for the Canadian Payday Loan Association.