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US Bank Puts Tight Loan Covenant On QC Holdings

Adam Rust's picture

Posted March 7, 2014

An SEC filing released this week by QC Holdings, a Kansas payday lender, suggests that US Bank intends to hold the company to a high standard as a condition of remaining as one of its borrowers.

This language appeared in the filing:

The amended covenant provides that effective as of January 31, 2014, the Company will not permit or suffer the Loss Ratio (as defined in the Credit Agreement) determined for the Company and its Subsidiaries on a Consolidated basis, as of the end of each fiscal month, measured on a trailing 12-month basis, to be more than or equal to (i) 30% for the monthly periods ending January 31, 2014 and February 28, 2014, and (ii) 28% for each monthly period thereafter.

The interesting thing about those numbers is that they happen to bump up against current practices at QC. In third quarter of 2012, QC's loss ratio was 26.8 percent. In the third quarter of 2013, QC's loss ratio was 36 percent and 32.8 percent in fourth quarter 2013.

US Bank

That said, this standard is only as strong as the determination that US Bank possesses to enforce it. US Bank's previous agreements also had a similar loss ratio covenant, but US Bank didn't do anything when QC could not meet it.  In fact, the only difference between the old one and this new one is the timing. Previously, QC had to meet that standard on an annual basis. Now their performance is up for review every month.

The whole thing is moot if USBank elects to write a standard that it has no intention of honoring. Indeed, a cynical observer might offer that the only point of having such a standard is to create a condition that triggers the need for a new loan. After all, each new loan throws off additional work for the banks' commercial lending division.  Notably, with that comes an additional round of transaction fees.

The most recent agreement called for QC to have a swingline and a term loan. The credit agreement extended through the fall of 2014.