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Wall Street Dubious About Community Choice Financial

Adam Rust's picture

Posted August 7, 2015

The people who make it their business to take a skeptical eye on everyone's affairs seem to have decided that the odds are against Community Choice Financial.

Community Choice is the corporate parent of Check$mart, Buckeye Check$mart, California Check Cashing, 1st Loans Financial, Cash 1, Cash & Go, First Virginia, Buckeye Title Loans, Easy Money and Check Cashing USA. They make retail payday loans in fifteen states and through the internet in twenty-four states.

Community Choice runs on loans from Wall Street. At the moment, they owe more than $500 million in various debt instruments. They have net tangible capital of minus $181 million. That's right - they have borrowed slightly more than half a billion dollars - and they have some stores, about $82 million in cash, and about $159 million in loans to show for it.

Through the largesse of those lenders - who probably keep the loans active because the alternatives are not much better - they can "keep on keeping on."  

Yesterday their senior unsecured notes were selling at $40.70. Earlier today, they were trading for $38.32. What that means is that someone out there is having the following conversation:

"So, we paid $100 for this stuff...and now it's hardly worth $40. We are getting killed. This is embarrassing. Do you think there is any chance that they will turn it around? What do you think we should do?"

"Maybe we should sell."

"OK, sure. But let me just whiteboard another idea first. What if we doubled-down? Bought more at $40. Heck, at $10.75 per $40, that's a great deal."

"No, we should sell."

But then those guys offered to sell at $40, and they didn't find anyone else who would take it.

By the way, these notes pay a coupon of 10.75 percent. This is at a time when a typical corporate note is paying about 5 percent. Theoretically, these bonds should be selling well above $100. Indeed, if Community Choice Financial's notes were paying a rate similar to what Cash America offers, then those loans would probably be selling for somewhere below $20. 

Perhaps the best thing this company offers is the chance to take some losses and pay less income tax.