Brian Korn, Pepper Hamilton LLP
John Hecht, Jefferies, LLC
Suketu Shah, AvantCredit
Croom Beatty, Susquehanna Growth Equity, LLC
#LEND360 ● LEND360.org
Agenda
Consumer Finance: Innovation Amongst Ongoing Disruption
• Market Update
– Trends in Online Payday Lending and Installment Lending
• What’s Going on Today - A Bridge to the Future
• Public Market Update
• Forward-Looking Thoughts
2
Jefferies LLC
Market Update – Trends in Online Payday and
Installment Lending
3
Jefferies LLC
Single-Pay Market Update
Recent Trends and Developments
Volumes and revenues decline due to regulatory interference/shift to multipay product…
Single-Pay Loan Revenues- St ore versus Online
Single-Pay Loan Volum es - St ore versus Online
$10.0
$60.0
$9.0
$50.0
$8.0
$7.0
$40.0
$B
$B
$6.0
$30.0
$5.0
$4.0
$20.0
$3.0
$2.0
$10.0
$1.0
$0.0
$0.0
2006
2007
2008
Retail
2009
2010
Online
2011
2012
2006
2013
2007
2008
Retail
Total
2009
Online
2010
2011
2012
2013
Total
While loan loss provisions increase modestly…
Payday Provisions/ Revenues
40.0%
35.0%
29.5%
30.0%
25.0%
26.7%
24.0%
23.5%
20.1%
25.7%
25.5%
24.0%
28.9%
25.9%
24.9%
22.8%
20.0%
17.1%
15.0%
12.3%
13.9%
10.0%
5.0%
0.0%
Source: Jefferies LLC / company data
4
CSH
DLLR
EZPW
2011
2012
FCFS
2013
CCFI
Jefferies LLC
Single-Pay Market Update
• Volumes declined ~6% while revenues declined ~3% in 2013 as…
– Industry consolidation continues/small operators close up shop
• Total domestic storefronts continue to decline ~3.5%
– Operation Chokepoint disrupts online lender and lead gen. markets
– Migration towards multi-pay products
• Regulatory focus is at Federal Level, State activity is relatively quiet
• Credit Costs / Provisions continued to grow YoY in 2013 due to:
– Operation Chokepoint disrupted ACH process
– Migration to new product/customers
• Innovation remains a key theme:
– Balancing customer demands and potential regulatory shifts
Source: Jefferies LLC
5
Jefferies LLC
Installment Lending Market Update
Recent Trends and Developments
Volumes increased 20% while revenues climbed 15% for public installment
(multi-payment) lenders…
Annual Installment Volumes - Public Filers
Annual Installment Revenues - Public Filers
$3,500
$1,000
$3,000
$800
$2,500
$600
$M
$M
$2,000
$1,500
$400
$1,000
$200
$500
$0
$0
RM
LEAF
2011
2012
WRLD
RM
2013
LEAF
2011
2012
WRLD
2013
Credit performance appears company-specific, but generally stable
Annual Installment Provisions- Public Filers
30%
25%
$M
20%
15%
10%
5%
0%
Source: Jefferies LLC / company data
6
RM
LEAF
2011
2012
2013
WRLD
Jefferies LLC
Installment Lending Market Update
•
Less perceived regulatory risk than single-pay product
•
Volumes and revenues both grew >15% in 2013 driven by
– Ongoing tailwinds from diminished supply of consumer credit in downturn
– Payday lenders rotating into installment
– Growing customer demand for borrowing from middle and lower income
•
Ongoing development of a broad, two-tier Market:
– Small loan segment (<$1,000) with smaller balances/higher yields and
shorter duration (3-12 months)
– Large loan segment ($2,000+) with higher balances/lower yields and
longer duration (9 months-3yrs +)
•
Credit trends primarily stable; but we observed some company specific issues
•
Competition is increasing with more lenders entering the market, but we
continue to see opportunities for growth for those with unique customeracquisition strategies (online, live-check, etc.)
Source: Jefferies LLC
7
Jefferies LLC
Recent Market Trends
•
•
•
Overall lending/borrowing trends:
–
We have continued to see growth in installment loan volumes and revenues, partially attributable to further
migration from single-pay to multi-pay
–
We have observed emerging credit concerns, although these appear company specific and not systemic
–
Overall, loan demand is consistent or modestly growing while credit is generally stable
Regulatory:
–
Awaiting Rule Proposal from CFPB pertaining to payday loans
–
CFPB and other Federal regulators are increasingly active in the space, issuing CIDs to numerous market
participants covering various products
–
Federal regulators appear to be increasingly focused on factors pertaining specifically to online lending
Payday / Single-payment Product Trends:
•
•
Installment Lending / Multi-payment Product Trends:
•
Pockets of growth potential exist due to loan demand and differentiated customer acq. models
•
Competition is increasing but operating metrics still suggest a rational environment
•
The re-emergence of traditional lenders is worth keeping an eye on… we are seeing some signs of traditional
lenders, such credit card issuers moving slowly down the credit spectrum
Source: Jefferies LLC
8
Payday lending continues to contract modestly given migration to installment lending, customer preferences
and regulatory pressures
Jefferies LLC
What’s Going On Today – A Bridge to the Future
9
Jefferies LLC
Regulatory Update
•
•
Relative status quo at state level
–
Continue to watch municipal activity (TX)
–
Many states have addressed lending rules recently, and may be watching the Fed to
determine what to do next
Federal activity has increased
–
–
•
UK Activity
–
Regulatory reform in UK is largely crafted and deployed (with rate caps coming in a few
months)
–
Industry currently experiencing ‘fall-out’ as operators migrate to new rules
Source: Jefferies LLC
10
Operation Choke Point (DOJ, FTC, OCC, FDIC involvement)
CFPB
• Issues 2nd white paper focused on roll-overs / repeat usage
• Engages in enforcement actions and issues CIDs to ‘peripheral’ industries
• Accepting payday lending complaints
• Anticipates issuing Advanced Notice of Proposed Rulemaking
• Issues more commentary specific to Online lending (data safety, etc.)
Jefferies LLC
Operation Choke Point
• Ongoing Influences of Operation Choke Point
– We believe Offshore and State Export model activity has been severely
constrained
– Tribal / Sovereign Nation model has been negatively impacted, and
operators appear to be migrating models / products
– Migration away from payday lending
• Innovation in customer sourcing and product development
– Issa Report issued on May 29th
• Critical of negative impacts to legitimate merchants
Source: Jefferies LLC
11
Jefferies LLC
Innovation!!!
• Recent regulatory activities reinforce the importance of innovation for
the alternative financial services industry
– Migration away from payday lending
– Increased focus on multi-payment / installment products
– Lenders appear focused on developing a continuum of products which
adjust pricing for risk and allow borrowers to improve their access to
credit and overall cost of credit
– Incumbent operators and new participants are building for the future developing models with flexible and long term approach
Source: Jefferies LLC
12
Jefferies LLC
Marketplace Lending
•
‘Marketplace Lending’ is a term that captures the trend of disintermediation:
whereby online marketplaces develop to create platforms to connect
borrowers with lenders
– The concept primarily relates to peer-to-peer lenders, but increasingly
reflects a focus on disintermediating the system away from traditional
lenders, towards more focused, streamlined and efficient lenders
– More broadly, we are observing the emergence of lenders who are taking
the shape of a Marketplace Lender by carving a niche (demographic or
credit based) and building a brand and ecosystem in order to ‘own’ that
specific niche over time
• Peer-to-peer lending
• Consumer lending (installment and payday lending) focused on
specific demographic or income segments
• Purchase finance...Etc, Etc, Etc...the market opportunities are endless
Source: Jefferies LLC
13
Jefferies LLC
Marketplace Lending
•
Why are borrowers, investors and operators focused on Marketplace lending?
– Banks / regulated entities are less efficient:
Peer To Peer Op Ex.
To Loan Balance
Bank Op. Ex to
Loan Balance
310 BPS
695 BPS
~400 BPS Cost Advantage
Lower potential lending rates
Higher potential Investor Returns
– Consumers do not necessarily prefer banks:
Source: St Louis Fed. Federal Reserve. Edelman PR Firm
14
Jefferies LLC
Near Term Developments
• Two important potential near term developments are worth following:
– Lending Club IPO
– Enova spin out
• These two events would result in having two independent, Online
consumer finance companies (or Marketplace Lenders) owned and valued
by institutional investors in a public forum
• May alter the paradigm for consideration of public valuations for certain
lending models
Source: Jefferies LLC
15
Jefferies LLC
Public Market Update: Valuation Trends
16
Jefferies LLC
Comparative Valuations of Public
Alternative Consumer Lenders
9/ 24/ 2014
Com pany Nam e
Sym bol
Pr ice
Rat ing
Pr ice
M ar ket
Tar get
Cap ( $ M M )
2014E
JEF CY EPS
2015E
2014E
JEF CY P/ E
2015E
EPS Gr ow t h
1 4 -1 5 Est .
P/
BV
2013A
JEF EV/ EBITDA
2014E
5.63x
Nonpr im e Consum er Finance
Cash America International, Inc.
EZCORP, Inc. Class A
First Cash Financial Services, Inc.
Regional Management Corp.
CSH
$44.15
NC
NC
$1,275.4
$4.35
$4.73
10.16x
9.34x
8.7%
1.14x
6.63x
EZPW
$10.08
Hold
$11.00
$510.2
$1.25
$1.63
8.07x
6.20x
30.2%
0.60x
4.83x
5.29x
FCFS
$56.15
Hold
$56.00
$1,598.6
$3.00
$3.37
18.71x
16.66x
12.3%
3.92x
12.36x
11.21x
11.36x
RM
$18.06
Buy
$22.00
$229.6
$1.69
$2.69
10.69x
6.71x
59.2%
1.42x
8.98x
LEAF
$32.50
Buy
$39.00
$3,732.1
$2.04
$2.34
15.95x
13.89x
14.8%
2.42x
NA
NA
W RLD
$70.47
Hold
$88.00
$680.6
$10.06
$11.43
7.01x
6.17x
13.6%
2.35x
6.43x
6.33x
M ean
1 1 .7 6 x
9 .8 3 x
2 3 .1 %
1 .9 8 x
7 .8 4 x
7 .9 6 x
M edian
1 0 .4 2 x
8 .0 3 x
1 4 .2 %
1 .8 9 x
6 .6 3 x
6 .3 3 x
Springleaf Holdings, Inc.
World Acceptance Corporation
•
•
Nonprime finance names trade in a wide valuation range - from ~6x to 16x+ CY 15 EPS estimates
–
Average P/E multiple of 10x and average EV/EBITDA multiple of 8x.
–
These represent discounts to the last expansion cycle
What matters to public investors that drives valuation?
–
•
What interests investors?
–
17
P/E, EV/EBITDA, growth opportunities, regulatory risk (and product mix) as well as credit risk/collateral
Getting ahead of a regulatory shift; swings in consumer credit trends; growth opportunities
Source: Jefferies LLC / FactSet / company data. Note, estimates for CSH reflect FactSet Consensus.
Jefferies LLC
Valuation Trends – EV/LTM EBITDA
12.0x
11.2x
10.0x
8.0x
6.0x
8.7x 8.9x
7.2x
6.8x
6.3x
5.0x
8.0x 7.8x
7.4x 7.5x
7.5x
8.1x
8.5x
6.8x
5.4x
4.0x
2.0x
0.0x
EV / EBITDA (TTM)
•
Nonprime consumer valuations have primarily trended up since the recession,
although not to the same extent as the broader market
•
Overall, multiples are lower than long term averages for expansion cycles, likely due
to regulatory uncertainty and residual concerns related to the last recession (credit
risk, etc.)
•
Regulatory clarity/maturation, ongoing innovation, technology deployment and
economic growth may serve to enhance industry multiples over time
18
Source: Jefferies LLC / FactSet / company data. Peer group includes CSH, DLLR (prior to 3/31/14), EZPW, FCFS,
RM and WRLD.
Jefferies LLC
Forward-Looking Thoughts
19
Jefferies LLC
Forward-Looking Thoughts
• The regulatory framework is maturing, which should enforce the
following tendencies:
– Ongoing product innovation:
• Focus on multi-payment products, risk adjusted pricing, customer
loyalty (or reward) programs
– Consolidation – with large players gaining market share
– Focus on compliance as a core competency (and rising expense, which
is easier for larger market participants to absorb)
Source: Jefferies LLC
20
Jefferies LLC
Forward-Looking Thoughts
• We expect further development of Marketplace Lenders
– New and incumbent operators will continue to seek control of a
specific/niche market
– Operators will build a specific / focused brand, fluid product sets and
customer loyalty programs to attract and retain customers
– Market participants will ‘win’ control of a market based on brand
recognition, market share, and operational scale potential (like many
Internet models)
– Ongoing product development and differentiated business models will
be key for customer acquisition and retention
Source: Jefferies LLC
21
Jefferies LLC
Forward-Looking Thoughts
• End market trends are supportive for alternative consumer lending:
– Traditional sources of capital remain restricted in providing credit to
middle and low income borrowers (although they are slowly coming
back)
– Middle and low income borrowers are slowly beginning to feel better
about employment opportunities, and may begin to feel better about
borrowing over time
– Increasing taxes, rising costs of living and slow wage growth also
support the ongoing need for credit from this borrowing class
Source: Jefferies LLC
22
Jefferies LLC
Forward-Looking Thoughts
• Regulators will continue to increase focus on this segment
– Recent actions from the CFPB, DOJ and FDIC suggest there will be
more coordination amongst Federal regulators
– We anticipate more activity out of the CFPB (such as a Rule Proposal)
– Increase frequency of CIDs across multiple product sets suggests that
Federal regulators are evaluating many different services and may
increase their scope over time
Source: Jefferies LLC
23
Jefferies LLC
Important Disclosures
24
Jefferies
JefferiesLLC
LLC
Important Disclosures
Analyst Certification
I, John Hecht, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Kyle Joseph, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Michael Del Grosso, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in this research report.
Other Important Disclosures
Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) group
companies:
United States: Jefferies LLC, which is an SEC registered firm and a member of FINRA.
United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England and
Wales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44
(0)20 7029 8010.
Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located
at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.
25
Jefferies LLC
Important Disclosures Cont’d
Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,
Singapore 048624, telephone: +65 6551 3950.
Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member
of the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 5251
6100; facsimile +813 5251 6101.
India: India: Jefferies India Private Limited, which is licensed by the Securities and Exchange Board of India as a Merchant Banker (INM000011443)
and a Stock Broker with Bombay Stock Exchange Limited (INB011438539) and National Stock Exchange of India Limited (INB231438533) in the
Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400 051, India; Tel +91 22
4356 6000.
This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information set
forth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any
obligation under applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless
prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC,
a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities
Exchange Act of 1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and
European Economic Area this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by
persons who have, or have been assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise
lawfully distributed. Jefferies International Limited has adopted a conflicts management policy in connection with the preparation and publication of
research, the details of which are available upon request in writing to the Compliance Officer. For Canadian investors, this material is intended for
use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to
other persons or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario).
26
Jefferies LLC
Important Disclosures Cont’d
For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limited pursuant to Regulation 32C of the Financial Advisers
Regulations. The material contained in this document is intended solely for accredited, expert or institutional investors, as defined under the
Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connection with this material, please contact Jefferies
Singapore Limited. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report
is issued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities
and Futures Ordinance and its subsidiary legislation. In India this report is made available by Jefferies India Private Limited. In Australia this
information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning of the Corporations Act
2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject of this document. Any
offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or product disclosure statement
within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authority under the laws of the
United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securities and Investments
Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under the Act in respect of the
provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should inform themselves about and
observe any applicable legal requirements in relation to the receipt of this document.
This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion or
estimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no
obligation to maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective
officers, directors, and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other
investments mentioned or described herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized
research products or services to certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over
varying time horizons or under differing market conditions. While the views expressed in these situations may not always be directionally consistent
with the long-term views expressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably
explained. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial
situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this report is suitable for their particular
circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to herein and the
income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original
capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
27
Jefferies LLC
Important Disclosures Cont’d
This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of
securities or as agent of any issuer of securities. None of Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make
any representations or warranty on behalf of the issuer(s). Jefferies policy prohibits research personnel from disclosing a recommendation,
investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation
or investment thesis. Any comments or statements made herein are those of the author(s) and may differ from the views of Jefferies.
This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s.
Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party.
Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are
not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such
content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or
fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory,
punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in
connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or
recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment
purposes, and should not be relied on as investment advice.
Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research is
simultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of
Jefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential
damages or losses arising from any use of this report or its contents.
For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES
© 2013 Jefferies Group LLC
28
Jefferies LLC
John Hecht
jhecht@jefferies.com
415.229.1569
Kyle Joseph
kjoseph1@jefferies.com
415.229.1525
Michael Del Grosso
mdelgrosso@jefferies.com
415.229.1576
Jefferies LLC