Cash Store Financial Services Inc., the payday lender that has fallen into bankruptcy protection, said Friday that its shares will be delisted from the Toronto Stock Exchange next month.
The stock, which is currently suspended from trading, will be removed from the TSX as of May 23 because the company no longer meets the exchange’s listing requirements, Cash Store said in a release.
Edmonton-based Cash Store, swamped with debt, has put itself up for sale as it tries to restructure its operations.
“Cash Store Financial remains committed to completing the restructuring process quickly and efficiently,” the company said in a release. Its executives declined a request for comment.
Cash Store is facing a cash flow crunch and has been granted protection from its creditors by an Ontario Court.
The beleaguered pay day lender – currently barred from making new loans in Ontario, its biggest market – estimates it was in the red by nearly $1.5 million last week and needs about $13.5 million to get through the next month.
Cash Store blames its lack of liquidity on increased government scrutiny and changing regulations, class action lawsuits, and a dispute with some of the lenders that supply its customers with cash, according to the documents filed in Ontario Superior Court of Justice this month.
“Cash Store’s liquidity position continues to significantly deteriorate and the current situation is dire. There is too much uncertainty and too many legal and business impediments to continue the strategic alternatives outside of an insolvency proceeding,” Cash Store vice-president Steven Carlstrom swore in an affidavit.
“Cash Store is unable to meet its liabilities as they become due and is therefore insolvent.”
FTI Consulting Canada Inc. has been appointed as monitor of the restructuring under the Companies’ Creditors Arrangement Act, known as CCAA.
Under terms of the agreement, Cash Store will receive debtor-in-possession financing of $20.5 million to stay afloat.
Cash Store has agreed to pay the lenders interest of 12.5 per cent per year for the first $12.5 million borrowed and 10.5 per cent for the rest, as well as other financing fees.
Cash Store called CCAA protection “the most prudent and effective way to carry on business and maximize value for the company’s stakeholders,” it said in a release.
“Cash Store is committed to completing the restructuring process quickly and efficiently. The company remains open for business, its branches continue to operate and daily lending is continuing.”
Doug Hoyes, a bankruptcy trustee with Hoyes Michaelos & Associates, described the turn of events facing the payday lender as “ironic.”
The irony is that a company that describes itself as “a leading provider of alternative financial products serving individuals for whom traditional banking may be inconvenient or unavailable” and has a section on its website about money management and controlling spending “has filed for bankruptcy protection because they are not very good at money management and controlling spending,” Hoyes said.
Hoyes Michaelos, one of the biggest personal bankruptcy firms in the province, analysed data from 7,000 debtors it assisted from 2011 to 2012. Hoyes estimates that about 12 per cent of debtors were payday loan customers when they went bust. On average, they had three payday loans and owed a total of about $2,500.
Hoyes said doesn’t believe that payday loans cause consumers go bankrupt. “It’s probably more of a symptom than a cause,” he said.
“But payday loans are particularly insidious because the interest rates are so high.”
Cash Store acts as a lender and broker for short-term loans. It also offers prepaid debit and credit cards, money transfer, and cheque cashing services.
Customers provide identification, proof of income and copies of recent bank statements. They then write a post-dated cheque or arrange a pre-authorized debit for the amount of the loan — typically from $100 to $1,500 — plus fees. The lender advances the cash and is repaid after the customer’s next payday.
Payday lenders, including Cash Store, have been criticized by the Ontario government for ensnaring customers in a cycle of borrowing that involves high interest rates and steep fees.
In Ontario, payday lenders are not allowed to charge more than $21 for every $100 borrowed.
Some borrowers find that after they repay the loan, plus fees, they don’t have enough for the coming week. That’s when they borrow again or turn to another payday lender.
“It’s a constant cycle,” Hoyes said.
Cash Store reported revenues of about $191 million and a net loss of earnings before interest, taxes, depreciation and amortization of nearly $1 million for fiscal 2013.
The company had total assets of $176.3 million as of Dec. 31, 2013. Its liabilities were nearly $184 million, including $139.5 million in long-term debt, according to the court documents.
Cash Store shares last traded at 14 cents on the Toronto Stock Exchange. Trading was halted last week when the company filed for CCAA protection. Cash Store voluntarily delisted its shares from the New York Stock Exchange in February.
There were about 17.5 million shares of Cash Store outstanding as of Dec. 31, 2013. The shares traded in the $18-range in April, 2010.
“Since Cash Store is unable to make new loans in Ontario, its ability to collect outstanding customer accounts receivable has also been significantly impaired,” Carlstrom said in his affidavit.
The court documents provide a fascinating glimpse into shifting payday loan landscape in Canada and its recent battle with regulators, as well as Cash Store’s internal business operations.
Canada’s payday lending market is worth about $2.5 billion in loan volume each year, and consists of about 2 million customers, the Cash Store said in its court filing.
An estimated 47 per cent of Canadians live from paycheck to paycheck. Of those, about 20 per cent experience cash flow problems and use payday loans, according to the documents. That’s about 7 to 10 per cent of Canadians.
Before Cash Store’s payday lending was suspended, it had about a 35 per cent share of the Ontario market, about the same as rival Money Mart. Independents fill in the rest of the market.
The documents note that Cash store branches, which operate under Cash Store and Instaloans banners, made 1.3 million payday advances in fiscal 2013 and its customer satisfaction rating is high at 88 per cent.
Cash Store has approximately 509 branches across Canada and 27 in the U.K. with a total of 1,840 employees. Ontario is its biggest market, account for about one-third of its branches and total revenue.
Since late 2009, B.C. Alberta, Saskatchewan, Manitoba, Ontario, and Nova Scotia have enacted payday loan legislation, limiting how much can be borrowed and for how long, as well as capping the fees that can be charged, the documents note.
Cash Store faced nearly $4 million in legal costs in 2013 related to class actions in BC, Alberta, Saskatchewan, Manitoba, Ontario and Quebec where customers allege the company overcharged them on fees or interest.
With the government cracking down on payday loans, Cash Store came up with a new strategy to entice borrowers: it planned to roll out a suite of line of credit products across the country.
In February, 2013, Cash Store unveiled its lines of credit in Ontario and stopped offering payday loans.
The move came just as the province’s registrar of payday loans announced it planned to revoke the company’s licence on the grounds that it had charged customers more than the legal maximum.
Cash Store allowed its payday loan licence to expire in July, 2013, arguing that it wasn’t needed to sell lines of credit.
The Ontario government disagreed and the dispute went to court.
In February, 2014, the Ontario Superior Court of Justice ruled that Cash Store’s basic line of credit is a payday loan in disguise – but with no licence, the lender was no longer allowed to issue them.
The registrar refused the company’s attempts to apply for a new licence, citing previous convictions for overcharging customers.
That effectively put Cash Store out of business in Ontario.
It is unable to make new loans, and the odds of collecting on the old ones are getting slimmer, the company said in the court filing.
Cash Store has business agreements with third-party lenders who extend cash to its customers, according to the court documents.
The lenders earn about 17.5 per cent interest per year on their funds. That includes voluntary retention payments that Cash Store provides on a regular basis to reduce the impact of loan losses.
Cash Store missed those payments in March as its liquidity problem got worse.
Two of its third-party lenders have requested their funds be returned, according to the court filing.
“The Cash Store does not have sufficient liquidity to fulfill these requests,” Carlstrom said in his affidavit.
When the firm filed for CCAA protection, it had about $18.7 million of broker loans outstanding, with about two-thirds of that in Ontario.
The third party lenders “will likely encounter difficulty collecting outstanding Ontario loans, as the Ontario Cash Store branches are currently unable to broker new loans for customers. Cash Store is not able to predict with any certainty the amount of Ontario loans that will be repaid,” according to the court documents.
Rothschild, a firm that specializes in global finance, and mergers and acquisitions, will continue to help Cash Store restructure, the company said in the court filing.
“It is my belief that Cash Store can be a viable business after undergoing a restructuring under CCAA,” Carlstrom said in his affidavit.