New Issue: EZCorp $175 million Convertible Senior Notes

by Bill Feingold and Jeffrey Alton, CFA

The Convert

EZCorp’s (EZPW) proposed convertible issue looks attractively priced. The optics are certainly good—on the midpoints, a respectable enough 2.5% coupon in today’s world and an old-school premium in the low 30% range. The five-year bullet structure helps as well. With DFC Global getting taken out of the convertible market, there’s room for a new issuer in the payday loan/pawn space. The implied CDS of around 700 basis points leaves plenty of room for credit improvement.

It’s a shade disappointing, given the stock’s poor performance in recent years, that the company is not being a bit more aggressive on the associated share buyback. It’s only buying up to 1 million shares. Assuming about 75% of the deal goes to unhedged investors, the balance of roughly $50 million face amount for arbitrageurs (with a green-shoe exercise) translates into $25 million in stock to short, give or take. The company is buying at most half this much.  Not an overwhelming show of confidence.

The Company

EZCORP, Inc. offers payday, pawn and auto title loan services in 1,342 stores in the United States, Mexico, Canada and the United Kingdom. The company also operates on-line in the UK and owns approximately 30% of Albemarle and Bond PLC in the UK and 33% of Cash Converters International Ltd. in Australia.

Pawn loan service charges account for about 25% of the company’s revenue and merchandise sales for about 36%. Pawn loans average $130 to $135 and can earn up to 20% per month. Unsecured consumer loans, or payday loans, account for about 25% of EZCORP’s revenue. The loan maturities range from one month single payment loans to the establishment of lines of credit. Unsecured consumer loans typically are in the $500 range, although payroll withholding loans in Mexico average $1,200. Single payment loan fees range from 15% to 30% and other loans average 40% to 50% but can run as high as 130%. Auto title loans have a similar profile, but the loans can run as high as $8,000 to $10,000.

EZPW is regulated by the Consumer Financial Protection Bureau (CFPB) created under Dodd-Frank. While each state regulates fees and interest rates, the CFPB does regulate ACH remittance practices, giving borrowers the ability to cancel ACH transfers to EZPW. Some states have also begun to look at regulation limiting fees and interest rates on short-term consumer loans.

Over the past year, the stock has fallen from $19 to $12 currently. Total revenues in fiscal 2013 (ended September 30) were $1.01 billion, up from $975 million in 2012. Revenues for the first six months of 2014 were $529 million versus $541 in the first six months of 2013.  Net income was $34 million in 2013, down from $143 million in 2012. Net income for the first six months of 2014 was $30.6 million, down from $63.7 million in 2013. Significant headwinds include lower gold scrap sales revenue from pawned jewelry, down 54% Y-O-Y in 2013 and 62% for the first six months of 2014. The company also reported lower margins on gold scrapped as well as an increase in bad loans from tighter CFPB regulation as noted above.