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Lawrence Meyers is the CEO of PDL Capital, which brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. He was the first U.S. journalist to cover the payday loan sector for The Motley Fool. He is a frequent contributor... More
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  • Debunking Citron's Hit Job on World Acceptance - Part 2 2 comments
    May 14, 2009 11:15 AM | about stocks: WRLD

    Picking up from my previous article, Citron continues their short-selling campaign against World Acceptance Corp (WRLD) by lobbing grenades at their perfectly legal business and accounting models.  Let's take apart Citron's latest pile of rubbish and demonstrate that, again, Citron's Emperor has no clothes.

    Citron's tactic is to make moral judgments about World to soften the reader up, and make them more likely to accept bogus claims about the state of World's financials and its business model.  Citron's National Enquirer headline, screaming at readers in bold, claims that "Financials at World are worse than they appear".

    This is an outright lie. 

    It’s a lie because Citron is 100% wrong about how World does business and accounts for it.

    Yes, World collects its revenue based on the "Rule of 78's", or using "pre-computed" interest.  This means that World's loan repayment schedule is amortized, just like a mortgage.  So monthly payments earlier in the cycle are devoted more to interest than to principal.   If World operates in a state that permits this methodology, they use it.  Therefore, it is legal.   It is also disclosed to the customer, per TILA.  

    A customer comes in, and wants a $1000 loan with 9 month maturity.  They get the loan at, say, 30% APR.  Under an amortized schedule, after four months, they will have paid $408.28 in principal and $113.48 in interest. 

    Then they refinance.   That means they are given a new $1000 loan, use $591.72 to pay off the remaining principal of their first loan, and walk out the door with $408.28.   They owe $1000, again due in 9 months.  So just like a mortgage, customers develop equity in their loans.  There is no “flipping”. 

    Citron claims, “When a borrower fails to make scheduled loan payments to a normal bank, the bank is required by regulations to categorize the loan as impaired.  With World, it just gets flipped to a new loan with a higher principal.”  False.

    What Citron implies is that World engages in “loan pyramiding”, in which another $1000 is added to the principal already due. Only an ignorant businessman would operate that way.  What idiot would add principal to a loan that the borrower is telling you they already will be unable to pay off?

    For Citron to claim that “much of this revenue is not real” is also false.  The revenue is real.  It’s cold hard cash that goes into World’s bank.   What Citron does understand is that the Rule of 78’s is not a Generally Accepted Accounting Principal.  So World uses the effective interest method – where the interest is spread out equally over every month -- but the differences between the two are negligible.  Ask your accountant.  He’ll agree.

    It's all right there in World's filings.  "Gross loans" is defined as full anticipated payoffs.

    "Unearned charges" are defined as income earned over time as payments are made.

    "Net loans" is defined as the true principal balance.  Very simple – if you want to take the time to learn the truth.

    It'd be one thing if this were Enron and it were a complicated business to understand.  But World's business is about as simple as they come, and if their auditing firm were deliberately misleading investors, everyone involved risks some pretty severe consequences.

    Therefore, Citron’s statement that “the income statement is a lesson in subterfuge… it just accumulates as a near half-billion receivable of dubious collectibility on its books” is also false. 

    As for that half-billion in receivables, they are most certainly collectible.  With the exception of charge-offs, which historically average 14 – 16%, these are all loans just like I mentioned.  People pay on them, they refinance, and they continue to pay on them.   And even if by some bizarre twist of fate, legislation were to put World out of business (it won’t happen - I'll tell you why in the next article), then World would just wind down their portfolio of loans.  People would pay off, but they couldn’t refinance.  Arguably, charge-offs might be higher, but World would obviously make whatever accommodations were necessary so they are paid off as much as possible,  Again, this is an extremely unlikely apocalyptic scenario –which I’m sure Citron will raise as being right around the corner in part 3 of their smear job.

    Citron claims that, “loans rarely go to maturity”.  False. 

    In fact, it’s hard to say just how many do go to maturity from reading the financials.  Let’s say the company starts with $500 million in receivables at the beginning of the year, and ends the year with the same amount.  The actual principal advanced would be 3 – 3.25 times that.  Why?  Because you must subtract the 16.5% in charge-offs that occur.  Then you add back the 12% growth that they had.  Then you account for the 73% of customers that refinance, and 7% of former borrowers who return for new loans (which begs Citron’s assertion, if they were being “ripped off”, why did they come back?)

    The result of all this is that you have a relatively high number of customers who owe nothing.  Their loans are paid off.  Want to know how many?  Call World’s CFO.  I’m sure he’ll tell you.  (Why didn’t Citron bother to do this?)

    We won’t even bother with Citron hauling out a few meaningless lawsuits.  I’ve already debunked why the New Mexico case will have no material adverse effect on World (the entire agreement isn’t void, only the arbitration clause is).  The other suits fall in the same category. The company does not disclose immaterial litigation, so why would it disclose immaterial litigation that has been settled.  But notice how Citron scares readers by saying how “doors will be opened…collections will be impaired…a loss in a class action could impair World’s operations….lead to a large adverse judgment…there is greatly increased risk that this suit will be litigated as a federal class action…” 

    The number of events that would have to occur for all these things to happen is as likely as Citron apologizing for every one of their lies.  These are all scare tactics with no substance behind them.   For God’s sake, Citron cannot even understand a balance sheet!  We’re supposed to listen to its legal opinion?

    And it doesn’t stop!  Citron claims the payday lenders have a better risk of collection on their portfolios than World does.

    Say it with me.  False”.

    World’s charge-off rate is 14-16%, which is LOWER than that of most payday lenders, which average in the low twenties! 

    As if Citron’s duplicity weren’t enough, they actually claim that World hastily convened a board meeting on Monday in response.  In fact, the board meeting had been scheduled far in advance, just like they always are, and they authorized a stock buyback because they think the stock is cheap.  

    And speaking of balance sheet ignorance, Citron asks how World, with only has $6.2 million in the bank, will buyback the $15 million in stock they’ve been authorized to.

    Uh, hello?  It’s called a bank credit facility, of which World still has some $40 million remaining on it.


    World Acceptance is on solid footing.  Their business model has supported them for 45 years.  Their business provides people who have little access to credit with a lifeline.  All fees and interest rates are disclosed.  The revenue realized is real, hard currency.  There are no accounting shenanigans, and no lawsuits that will materially affect the company.

    Citron would be wise to issue a retraction.  My old high school teacher would chastise us whenever we were being stupid.  He told us that meant we were being ‘intellectually lazy”.

    The question for Citron’s Andrew Left is this:  Are you being stupid or are you deliberately making false statements about the company to cause a selling frenzy because you are short.

    Perhaps the SEC would like to know, also.


    Full Disclosure:  Long WRLD, just after Citron published it's first report.




    Stocks: WRLD
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Comments (2)
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  • john raguso
    , contributor
    Comment (1) | Send Message
    Last Friday, noted that more shares of WRLD were bought than sold. Yet the stock still went down!! That means chicanery! Read below


    May 11, 2009 (M2 PRESSWIRE via COMTEX) -- BUYINS.NET,, announced today its proprietary Market Maker Friction Factor Report for May 8, 2009. Since late October market makers are now required to be on the bid as much as they are on the offer and for like amounts of stock. This "fair market making" requirement is designed to prevent market makers from manipulating stock prices. On Friday there were 3,057 companies with "abnormal" market making, 4,935 companies with positive Friction Factors and 1,328 companies with negative Friction Factors. Here is a list of the top 5 companies with the Abnormal Price Friction (unfair market) in their stock prices. This means that there was more buying than selling in the stocks and their stock prices dropped. Coinstar (NASDAQ: CSTR), Childrens Place Retail Stores (NASDAQ: PLCE), Watson Wyatt Worldwide (NYSE: WW), Jos A Bank Clothiers (NASDAQ: JOSB) and World Acceptance Corp (NASDAQ: WRLD). To access Friction Factor, Naked Short Data and SqueezeTrigger Prices on all stocks please visit


    Market Maker Friction Factor is shown in the chart below:


    Symbol Change % BuyVol Buy% SellVol Sell% NetVol Friction


    CSTR -$2.28 -6.44% 764,171 48.99% 680,485 43.63% 83,686 abnormal


    PLCE -$2.15 -5.97% 664,322 51.84% 608,260 47.47% 56,062 abnormal


    WW -$1.98 -4.73% 582,860 41.34% 577,059 40.93% 5,801 abnormal


    JOSB -$1.84 -4.77% 523,076 47.80% 483,996 44.23% 39,080 abnormal


    WRLD -$1.62 -7.56% 1,507,912 79.69% 539,552 28.51% 968,360 abnormal


    John Raguso
    14 May 2009, 11:34 AM Reply Like
  • westmalle
    , contributor
    Comment (1) | Send Message
    While I won't discuss the morality of it, I have some issues with your assertion that "flipping" makes no difference, and especially the idea that you build equity.


    If we extrapolate your own example up to the end of the year, refinancing every four months, the APR for the lender is at least, (1.11348)^3 - 1 = 38% It is in fact more as I don't know the exact payment schedule. I would be VERY surprised if the persons entering into this kind of loan are aware of the difference.


    It gets worse, assuming equal monthly payments, your example implies a payment of 130.44 per month, Excel XIRR tells me that the equivalent APR is 48.6%. Again, I would be surprised people making these loans can understand the real APR. By the way, I suspect this might be an error on your side (I certainly hope so). If not this 78 rule is rather dubious. Especially because I assume there are also probably some fees thrown in.
    15 May 2009, 01:28 PM Reply Like
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