Friday 31 July 2015 by William Arnold Company updates

Class action launched against Cash Converters

On Thursday, Maurice Blackburn launched another class action against Cash Converters (CCV). The class action will seek refunds of all brokerage fees paid by an estimated 30,000 Queensland borrowers from 30 July 2009 until 30 June 2013 – an amount estimated at “up to $30m”

A statement by Maurice Blackburn outlined the case and noted that, despite laws in Queensland capping interest rates at 48% p.a. on consumer credit contracts, Cash Converters charged borrowers in that state additional brokerage fees in order to access the company’s personal loans. The law firm said the fees amounted to 35% of the principal sought, pushing the effective interest rate to 160% p.a. in some cases.  The case will also argue that the charging of brokerage was unconscionable because “the service provided by the broker was illusory.”

Maurice Blackburn said the case was in response to enquiries from Queensland customers of Cash Converters, after it settled another class action against the company in NSW for $23m in June.  Settlement in that case was reached without any admission of wrongdoing or liability by CCV and was against a lending system only used in that state – meaning CCV will not face litigation on that matter in other states.

CCV is in trading halt and is yet to comment on the situation.

Implications

Financial:  The class action has only just been launched, so there is no immediate financial effect on CCV.  Such actions have the potential to run for years.  The prior legal action took around two years to complete.

Even if the full $30m amount is paid at some point in the future on top of the last $20m (paid from cash holdings), the amount is manageable.  CCV held about $43m of cash on the balance sheet at 1H15 and is likely to post about $60m in underlying EBITDA for the full FY15. The company is forecast to pay out some $20m in dividends FY15 which can obviously be cut or reduced going forward if capital is needed to be built.

The possibility of further litigation:  A key risk is the unknown around the possibility of any future litigation.  While the previous settlement and the current suit (if settled at some point) are manageable by the company’s current resources - the possibility and scale of any future action is a risk.

In the worst case scenario, Cash Converters could raise equity if needed.  The company most recently raised $45m in November 2014.  CCV’s largest shareholder with 30% of the company, EZCorp (an American pawn broker/payday lending company with a $450m market cap) has been supportive when CCV has come to the market and is likely to continue to be so.

Possibility of withdrawal from payday lending sector by Westpac:  Westpac is the only “big four” bank to lend to the payday lending sector, including to CCV.  The bank is currently conducting a review of this policy with options including exiting the sector and putting tougher terms and conditions on loans.

If Westpac does decide to exit the sector, the bank will still need to honour its contractual obligations. Ultimately there are other financiers that would likely be more than comfortable taking on CCV’s facilities.