We review the company’s current issues that would be of interest to bondholders. These include: replacing banking facilities, government review of the sector, management changes/strategic business review and litigation. We also provide an update on CCV’s current financial position
Cash Converters (CCV) currently faces multiple issues of varying risk.
While the biggest short term risk is from being unable to find a replacement transactional bank, the company appears confident in addressing this in its ‘normal course of business’. In terms of the current lawsuit, while not positive it is not overly concerning as the amount is more than manageable and the process will likely take 18 months or more. The main risk is the unknown around the possibility of any further litigation. All issues aside, CCV’s underlying business remains in a solid position and the recently announced full strategic review is positive especially as it will be completed by an independent party.
There is potential upside in the short term given two key unknowns are likely to be addressed: the issues around new banking/financing facilities are likely to reach some conclusion in the short term and the government review (which we expect to be benign) will be completed before the end of the calendar year. If the banking situation is addressed in a satisfactory manner in the ‘normal course of business’ as CCV suggests, its bonds appear to offer attractive value at present. The indicative yield to maturity is around 550bps over or 7.70%*.
Replacing banking facilities - Key unknown
With Westpac backing out of the payday lending sector, (as previously discussed in full here) CCV will need to refinance its receivables facility and find a new transactional bank. CCV has engaged a specialist company to advise on this matter. The refinancing of its facilities should not be an issue – it is an underlying profitable company and there are many financiers that would likely agree to provide funding.
The key risk is finding a new transactional bank. This encompasses services such as trading accounts, payments, cash and merchant facilities like eftpos and cards. With the major banks out - this leaves lower tier institutions, international banks or specialist companies. Typically second tier institutions (credit unions, building societies and regional banks) are as or more ‘socially conscious’ and likely to have limited interest like Westpac. This means the pool of possibilities is most likely limited to international banks - Provided they can provide the full suite of services (which is part of the risk). The company has stated it expects to have these matters sorted in the ‘normal course’ of business.
Government review - No material impact expected
In July, the Federal Government commenced its long awaited review of the 2013 National Credit Legislation (first highlighted last year). It is our understanding that the review is meant to fix unintended consequences of the 2013 regulations, not to make material changes.
It is believed the main area to be addressed will be consumer leases (for example the type of business Radio Rentals and others conduct). CCV does not do consumer leases. However the review does have a broad scope.
Management changes and comprehensive business review - Positive
In September CCV announced chairman Mr Reginald Webb intends to retire from the Board following completion of the 2016 financial year. At the same time, Mr Ian Day (CEO, Australia) also announced his retirement after 23 years with the company to be replaced by Mr Mark Reid.
It is understood the veteran chairman and executive have been planning to retire and, given the tumultuous year CCV has had, now seemed as good a time as any to make this move.
Non-Executive Director Mr Stuart Grimshaw has been appointed interim Chairman and will immediately undertake a review of the company’s Board structure and composition. More independent directors are likely to be appointed – which is positive.
The company has also appointed consulting group CACE Partners to conduct a full review of the business across geographies, distribution channels and product lines. CCV wants an outside independent specialist to assess its businesses, which would include advising on the future strategy for more troubled segments such as Carboodle and the UK operation. This too is positive.
CCV will formulate a ‘three year strategic growth plan’ and expects to be in a position to provide a market update on the outcomes of the review and the forward strategic plan around January 2016.
Litigation - Current lawsuit of limited concern, risk is the unknown around any future litigation
In July, Maurice Blackburn launched another class action against CCV for an amount estimated at “up to $30m”. Full comment on the current litigation can be found here while full comment on the prior settlement can be found here. The company has appointed specialist class action lawyers (unlike last time) and intends to fight the suit. The process is likely to take 18 months or more.
Financial impact: Even if the full $30m amount is paid out at some point in the future, the amount is manageable. CCV held about $52.4m of cash on the balance sheet at FY15 and is generating $60m plus in annual underlying EBITDA. The company paid out some $20m in dividends in the trailing 12 months which can be cut if needed (noting a final dividend for FY15 was not declared as bank covenants were triggered given the loss posted).
The possibility of further litigation: A key risk is the unknown around the possibility of any future litigation. The current suit is related to a lending system only used in Queensland and therefore CCV will not face litigation on that matter in other states. However, given the prior settlement related to a matter only occurring in NSW, this will obviously not restrict other action on other matters should these arise.
Financial position - Strong
CCV’s underlying business is strong and displays continued growth as previously discussed here. The group generates strong cashflow and on an underlying basis is in a solid position with normalised interest cover of 6.9 times and net debt to normalised EBITDA of only 1.2 times FY15.
|$m ||FY15 ||FY14 |
|Revenue ||374.9 ||331.7 |
|EBITDA ||9.3 ||51.6 |
|NPAT ||(21.5) ||24.2 |
|EBITDA (normalised) ||62.7 ||55.9 |
|Cashflow from operations (normalised) ||42.8 ||4.4 |
|Cash ||52.4 ||26.8 |
|Net debt ||74.7 ||97.2 |
|Normalised EBITDA/Interest ||6.9 ||6.5 |
|Net debt/Normalised EBITDA ||1.2 ||1.7 |
*Pricing is indicative only as at 17 September 2015 and subject to change. Please contact your FIIG representative for more information.