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Lone Star Inserts Interesting Caveat in Deal with DFC Global

Adam Rust's picture

Posted April 4, 2014

Turns out that Lone Star's bid to buy DFC Global comes with a significant regulatory contingency.

In section 6.2 of the contract Lone Star says that it can walk away from the transaction if the UK's Financial

Conduct Authority moves to place caps on permissible debt-to-income ratios.

Section 6.2(d) Absence of FCA Action. After the date hereof, the FCA shall not have taken, any of the following actions against the Company or any of its Subsidiaries: (i) communicating in writing by notice given under section 55X(2) of FSMA that the FCA will not approve an application by the Company or any such Subsidiary for Part 4A permission to conduct business at the end of the interim permission period; (ii) the making of a public censure under section 205 of FSMA, or the imposition of any financial penalties in excess of GBP 2,500,000 under section 206 of FSMA; (iii) providing written notice under section 207(1) of FSMA that the FCA proposes any suspension of the Company’s or such Subsidiary’s interim permission, or of the imposition of a restriction on such interim permission that would prohibit the offering of a specific product or dealing with a class of customers pursuant to section 206A of FSMA; (iv) providing written notice under section 63 or section 67 of FSMA that the FCA proposes to withdraw (under section 63) or suspend (under section 66) the Company’s or such Subsidiary’s FCA-approved persons at Controlled Functions 1 or 3; or (v) commencing an enforcement action specific to the Company or any such Subsidiary that would impose a cap on loan rates, limit rollovers to one per loan, prohibit the offering of a specific product or dealing with a class of customers, or limit the amount that may be loaned to a borrower to 33% or less of the borrower’s net monthly income; in the case of any of the foregoing actions, whether or not based on conduct occurring while the Company or such Subsidiary was subject to FCA supervision.

The clause goes on to ask for other unforeseen regulatory interventions: limits on rollovers and/or protections for certain classes of customers. But the big one is the language specifying that the FCA has to allow companies to sell loans that put borrowers in a situation where they owe more than one-third of their monthly income to the lender. Just the idea that such a constraint would be necessary is in and of itself telling. For one, it begs a person to wonder how such a loan could be underwritten. It also makes one ask how any lender could ever expect to re-capture their principal. Anyone owing that much is a likely candidate for a default. But that goes back to the desire to have limitless rollovers. Cleary Lone Star wants a business where ability-to-repay is fairly irrelevant. In fact, the model probably goes something like this

(Fees & originations) - (principal) - (customer acquisition) - (fixed costs) - (cost of capital) must be greater than $0.

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