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Rating Action:

MOODY'S ASSIGNS B2 RATING TO DOLLAR FINANCIAL GROUP'S SENIOR NOTES

07 Nov 1996
MOODY'S ASSIGNS B2 RATING TO DOLLAR FINANCIAL GROUP'S SENIOR NOTES New York, 11-07-96 -- Moody's Investors Service has assigned a B2 rating to the senior notes issued by Dollar Financial Group (DFG). The rating reflects DFG's substantial leverage and large debt service requirement, rapid growth through acquisition, keen competition, reliance on government contracts for a large portion of revenues, the development of an unsecured loan product, key man risk, and the subordination of the issue to secured bank debt.
However, the rating also considers the growing need for the company's services among a large cash-dependent population, DFG's position as a consolidator in a fragmented industry, an experienced management, and technological upgrades that help limit losses by allowing the company to investigate an account before cashing a check.
DFG targets customers that are asset limited and income constrained. These are generally working individuals or families earning an hourly wage, often from multiple jobs. Demand for the company's services has climbed as commercial banks have changed their pricing practices, which has made banks' fee schedules more expensive than check cashing charges, and as banks have been closing branches in low-income neighborhoods.
DFG's strategy has been to seek out the best run, most profitable units with an ethic of customer service, good locations, and high volume. The company endeavors to keep management, employees, and customers and, going forward, leverage technology and systems to grow volume and expand the product line.
Check cashing fees will account for about 60% of revenues after the acquisitions, and should continue to make up the majority of revenues. Check cashing fees range from 1% to 6% of the face amount of the check depending on the type of check. While customers may cash any kind of check at Dollar, most are payroll (50%) or government checks (26%). The average face amount per check in 1996, pro forma for the acquisitions, was about $262 dollars, with fees averaging 2.93% of face, or $7.67 dollars. DFG's returned check loss experience has been relatively consistent over the past six years, and collection efforts have been good. Any unpaid check is recorded as a loss during the period returned, and collection attempts begin. For the 5 1/2 year period ending June 30, 1996, net write-offs after collections as a percentage of check cashing revenues averaged 5.2% with a peak of 5.8% in 1995. Net write-offs as a percentage of the face amount of checks cashed averaged 0.14% for the same period with a high of 0.16% in 1995.
The distribution of government benefits accounts for 21% of DFG's revenues, pro forma for the acquisitions, with the majority of these revenues from the Philadelphia area. While the company has an excellent track record of winning contract renewal bids, these contracts come up for renewal over the next few years and are also at risk to the installation of electronic benefit transfer which is not check based. Money transfers and money order sales will account for 4.5% and 2.5 of revenues, respectively.
DFG will expand its offerings with an unsecured loan, the "Cash-'Til-Payday" loan. Moody's views this portion of DFG's business as higher risk than the core check cashing business, but will only represent a small portion of DFG's business. The loans will be originated by DFG with Eagle National Bank acting as the lender. However, DFG retains the majority of the credit risk by capping Eagle's losses at 3% of face. In order to qualify for an unsecured loan, a borrower must prove nine months of employment, and have a checking account open for at least nine months. Borrowers who qualify pay a $12 dollar fee for a two-week $100 dollar loan, or the equivalent of 312% per anum. A small existing program run by the company in Utah has averaged losses of 4% of face.
The check cashing business originated in New York City and Chicago in the 1930s, growing to other cities through the late 1970s. By 1986 there were about 1,400 check cashing stores nationwide, and by 1996 that number had grown to 5,300.
DFG's largest competitor is ACE Cash Express, a pubic company that has grown through the building of new stores. DFG in contrast has expanded by acquiring small chains of 15 to 60 stores. The strategy of buying established units in good locations has benefited DFG's fee income per unit, evidenced by DFG's $300,000 average in fees per unit versus Ace's $148,000 in fees per unit. DFG is number two in store count, but number one in terms of revenues and profits. The number three competitor is Pay-O-Matic in New York City. Pawnshops are also competitors for loans.
Proceeds from the offering will be used to repay bank debt incurred from previous acquisitions, as well as to fund the purchase of three additional check cashing chains. In addition to the senior notes, DFG has received a commitment from Bank of America for a $25 million revolving credit facility. The facility will be secured by a lien on effectively all the assets of the company and subsidiaries, and be subject to a borrowing base limitation based on cash and checks held in stores as well as government receivables.
Pro forma for this financing, DFG will be highly leveraged, with total debt to EBITDA of 4.8 times, total debt to capitalization of 74%, and EBITDA to interest of 1.8 times.
The senior notes will be sold in a privately negotiated transaction with registration rights under the Securities Act of 1933 under circumstances reasonably designed to preclude distribution thereof in violation of the Act. This issue has been designed to permit resale under rule 144A.
Dollar Financial Group, headquartered in Berwyn, Pennsylvania, is owned, on a fully diluted basis, by Weiss, Peck and Greer, 48.1%; senior management, 19.5%; Pegasus Partners, 16.8%; and GE Capital, 11.8% and others.
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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