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Lawrence Meyers is the CEO of Asymmetrical Media Strategies, a firm specializing in crisis communications that develops and executes protocols for companies and industries under assault from external forces. Asymmetrical’s experience extends across multiple disciplines and sectors. Lawrence is... More
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  • Debunking Citron's Hit Job on World Acceptance Part 3 4 comments
    May 28, 2009 1:20 PM | about stocks: WRLD

    Citron Research, run by the notorious Andrew Left, has already seen its short-selling attacks on World Acceptance Corporation (WRLDdiscredited by this column.  Further insisting on embarrassing himself, Left launches into part three of his character assassination by  demonstrating his ignorance of World's business model, as well as the legislative environment.

    Today I'll debunk all his assertions, but also let readers in on the dirty little secrets Left hasn't disclosed about himself which should give any reader pause.

    The REAL Regulatory Risks

    Left's rubbish begins as it always does -- with fear-mongering.  He cites the overwhelming support of the recent credit card bill, and potential new regulations in the for-profit education industry, as being threatening to World's business model.  What he doesn't mention is that neither are in any way related to what World does.  The goal is to scream that the legislative environment is unfavorable, and World could be next! 

    He follows this up by frothing at the mouth -- that World will "unavoidably (in big red letters!) become a target of new regulation that will limit operations of their core installment loan business".

    "Unavoidably (in big red letters)"?  Really?  So Citron's opinion is that legislation will happen, period.  No doubt about it.  As sure as the sun rises each day.  Furthermore, Left claims, there are three federal bills that "have widespread support" and that just last week, four bills died in the Texas Legislature's committees.   He states, "for anyone to state there is no legislative risk, they obviously do not have CNN or read a newspaper".  Well, here's all the reasons why Left should stick to sucking lemons and following legislative details more closely, instead of predicting how Congress will behave based on a parochial view of politics.

    1) Sen. Tim Johnson (D-SD) is the chair of the Finance Subcommittee. He supports payday and installment loans and understands their value.

    2) Durbin is not on the finance committee, and cannot force his bill to be heard.

    3) Durbin withdrew the bill as an amendment to the credit card bill, because the votes weren't there to get it passed.  If it didn't pass then, why would it pass on its own?

    4) The Senate overwhelmingly voted down an amendment capping credit card rates at 15%. This implies broader concerns Congress has about price controls.

    5) The House Subcommittee hearing on Rep. Gutierrez's payday loan bill (April 2) showed that many committee members also understand payday loans and aren't willing to institute a de-facto ban by capping rates at 36%.   If they won't ban payday loans, they won't ban the less-expensive installment loans.

    6) Obama is not stupid. He cannot restrict credit in this environment.

    7) Once it becomes apparent that the new credit card bill is going to restrict credit (some say as high as $3 trillion, although I think that's too high), this will further work against these bills.

    Left admits that none of these bills have passed, but "these risks do exist", and that World's new 10-K must show a change in the disclosure about regulatory risk.   Except they already altered their disclosure in the last quarterly report, reflecting the possibility of legislative changes.   Did Left even read it?

    Sure, these risks exist.  And they've already been priced into the stock.  Furthermore, there are risks that many other things could happen.

    A meteor could crash into the Earth.

    A raging forest fire could kill all living things in Iceland.

    Godzilla could rise from the Bermuda Triangle and eat Cuba.

    Left could be indicted by the SEC.

    As for the situation in Texas, the legislature there meets every other year for only a few months at a time.  And this session is about to conclude.  Furthermore, the bills Left refers to are being pushed by a state senator who has no leverage in the committee he's in, while being up against a very pro-business legislature and governor.  Again, its the details Left doesn't bother to concern himself with.

    Lies or Stupidity?

    Left is either incapable of reading a balance sheet or is outright lying with respect to his claims regarding tangible book value.   He claims that the market is valuing World at less than tangible book value because World's main asset -- $460 million in loans -- isn't worth anything.

    But I've already shot down that argument in my previous articles.   The reason is that the historical loan loss provision for these receivables is about 16% -- meaning $390 million of it is collectible. 

    Left closes his article by saying, "Citron strives to present stories detailing business risks, which are, to date, being ignored or denied by the subject company and its analysts, always backing up its opinion with factual links."

    First, the links may be factual.  But Left hasn't interpreted them factually.

    "It believes caricaturizing critical opinion as 'fear mongering' is foolish, and savvy investors ignore risks at their own peril."

    Yes, they do.  Savvy investors also know a hatchet job when they see it.

    A Question of Character

    Now, as to Left's own personal history, which should give readers some idea about his character.  Back in 2000, the National Futures Association (a regulatory agency watching over the commodities and derivatives markets) found that Left had made "false and misleading statements to cheat, defraud, or deceive a customer".  He was barred from "association with and from acting as a principal of any NFA member for three yeras, ordered him to take an ethics training course, and placed restrictions on his activities..." (Source: NFA Case ID# 0253075)

    Oops.

    Then there was the little matter of Left being sued for Fraud and Deceit, Negligent Misrepresentation, and Breach of Fiduciary Duty -- a case which he lost and was ordered to pay restitution for.

    Double oops.

    So, we have a known short-seller with a previous history of ethics violations and check fraud, who has written three articles loaded with false statements that have been completely discredited....and is no longer permitted to post even here at SeekingAlpha.

    As my old math teacher once said, "Take a moment to think before following the White Rabbit down that hole".

    So just as Left claims to put out his information and let the reader decide, I'll do the same. 

    Full Disclosure:  Long WRLD - shortly after Citron's first report

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Comments (4)
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  • joeterranova99
    , contributor
    Comments (6) | Send Message
     
    Larry,
    Read your three pieces on WRLD. Some comments...
    1) You note more than 73% of customers refi loans.. why would they do this other than being incapable of paying?
    2) You say if the customers found terms unattractive they would just move on -- they can't -- they dont have access to credible institutions and are in debt over their heads
    3) The New Mexico case and similar ones are material because if a ruling says the rates violate state law, WRLD would potentially be out of yet another state (now only in 11) to do business
    4) You claim they dont loan pyramid but it certainly looks that way... they have an ever growing loan book with 3/4 of the customers being the same
    5) You say the revenue is real because its cold hard cash that goes into the bank.. not true... customer leaves with some cash and a higher IOU ... WRLD recognized fees in higher IOU as income... they actually dont take in cash, rather give more of it out and grow the loan book
    6) You continually refer to 14-16% default numbers -- those are just the number of loans that have not been flipped... other near delinquent borrowers are rolled into a new bigger debt piece and dont show up in default numbers
    7) The default rates should be much higher, evidenced by the numbers you provided ... if payday lenders, who have more security and collateral have low 20% default rates, it logically follows that unsecured WRLD loans should have higher default rates, not significantly lower ones
    8) Doesnt it seem weird to you that the company continues to buy stock, not from free cash flow, but rather by tapping ever increasing revolvers?
    9 Feb 2011, 12:27 PM Reply Like
  • Larry Meyers
    , contributor
    Comments (435) | Send Message
     
    Author’s reply » Joe:
    You are wrong on every count. You do not appear to understand, or have read, the SEC fililngs of WRLD or payday lender.

     

    1) You note more than 73% of customers refi loans.. why would they do this other than being incapable of paying?

     

    Who says they are incapable? They MIGHT be. Rather, they merely want to extend the loan. If all were incapable, then the default rate would be higher than 16%,

     

    2) You say if the customers found terms unattractive they would just move on -- they can't -- they dont have access to credible institutions and are in debt over their heads

     

    False. This is a standard misunderstanding of the customer. You presume, incorrectly, that they are in debt over their heads. They simply have poor credit.

     

    3) The New Mexico case and similar ones are material because if a ruling says the rates violate state law, WRLD would potentially be out of yet another state (now only in 11) to do business

     

    False. The rates do not violate the state rate laws WRLD operates in. If they did, WRLD would not be operating in them.

     

    4) You claim they dont loan pyramid but it certainly looks that way... they have an ever growing loan book with 3/4 of the customers being the same

     

    This has been addressed already. Read again.

     

    5) You say the revenue is real because its cold hard cash that goes into the bank.. not true... customer leaves with some cash and a higher IOU ... WRLD recognized fees in higher IOU as income... they actually dont take in cash, rather give more of it out and grow the loan book

     

    False again. WRLD recognizes fees as income when they actually receive income. They recognize any kind of IOU as an asset on the balance sheet called a "receivable".

     

    6) You continually refer to 14-16% default numbers -- those are just the number of loans that have not been flipped... other near delinquent borrowers are rolled into a new bigger debt piece and dont show up in default numbers

     

    False again. It is the percentage of principal that has been defaulted. Again, if you read the piece and the SEC filings, you'll see that the loans are refinanced with a SMALLER principal than the original loan, not LARGER.

     

    7) The default rates should be much higher, evidenced by the numbers you provided ... if payday lenders, who have more security and collateral have low 20% default rates, it logically follows that unsecured WRLD loans should have higher default rates, not significantly lower ones

     

    False again. Payday lenders have defaults as a percentage of principal of about 6%. And payday lenders do not even have collateral. They are unsecured loans.

     

    8) Doesnt it seem weird to you that the company continues to buy stock, not from free cash flow, but rather by tapping ever increasing revolvers?

     

    If the return on their investment from the stock buybacks exceeds the rate of interest, then why is that a bad idea? And given the current stock price, they are seeing well in excess of 50% returns on their buybacks.

     

    You have a lot to learn, my friend. But I'm happy to educate.
    18 Feb 2011, 03:43 PM Reply Like
  • joeterranova99
    , contributor
    Comments (6) | Send Message
     
    1) I’m claiming they are likely incapable because their poor credit history points to a likelihood of failing to repay. Again, I think the default rate is bogus because instead of recognizing a customer’s failure to make a payment, the company (from your article) “admits that it – GASP – ‘actively encourages customers to refinance existing loans, increasing the amounts borrowed and fees paid’".

     

    2) I will refine my claim and get rid of the assumption. They can’t “just move on” because they don’t have access to many if any other institutions thanks to their poor credit history.
    As an aside, aren’t you just presuming they are not in debt over their heads. Or can you point to your source of information on WRLD customers’ personal financial situation.

     

    3) Whether or not the rates are in violations (as well as WRLD collection practices, etc) is a matter for the judge to decide. That is the risk. Unfortunately, your certainty doesn’t affect the likelihood of a judge ruling in WRLD’s favor. Furthermore, there is always the possibility of federal law changing (specifically when Consumer Protection revs up later this year).

     

    4)I reread your piece and the only words I saw addressing this issue were as follow:
    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 he already will be unable to pay off?
    To answer your question, the executives at WRLD. By doing so they can recognize revs, increase loan book, and make those numbers continue to look sweeter.

     

    5) Sounds like an accounting misunderstanding here. By cash, I mean greenbacks, Benjamins, dollars, etc. Income is an accounting measure. Hypothetically if a consumer came in and refinanced his original loan of $500 for $600 (with $25 in fees), the company recognized $25 in revenue (the fees) on the income statement, an increase of $100 in receivables on the balance sheet (from $500 to $600), and the customer walks out the door with $75 in cash (the extra $100 minus $25 in fees).

     

    6) I’ve read both and see only a growing average consumer loan. If nearly 75% of the loans are refinances and the average loan is growing steadily, how can the loans be getting smaller? Please tell me where you are deriving this information.

     

    7) In your article you wrote, “World’s charge-off rate is 14-16%, which is LOWER than that of most payday lenders, which average in the low twenties!” Please reconcile the two numbers you provided (“low twenties” and “6%”).

     

    8) Frankly, I’ll give you this one. They (WRLD execs) have been executing this scheme flawlessly for years. Why not have the company borrow money, use it to buy stock, then sell your personal stock? It’s brilliant.

     

    Thanks for the interaction.
    22 Feb 2011, 05:15 PM Reply Like
  • Larry Meyers
    , contributor
    Comments (435) | Send Message
     
    Author’s reply » 1) "I think the default rate is bogus". This says it all. You don't seem to have heard of Sarbanes-Oxley, that funny little SEC requirement that says you are criminally liable if you misrepresent information in SEC filings.
    2) You're the one making the claim. Look into the 10-K.
    3) You are really showing a lot of ignorance. It's really very simple. Look at the states in which WRLD operates. Go read the state statutes regarding consumer loans. Then you will be educated and learn they are operating within every state statute. Yes, there is the possibility of the CFPB restricting their business in some way, but the Dodd-Frank law specifically prohibits the agency from setting rates. Please educate yourself!
    4) You are wrong. Again. Go read ALL my other pieces. The way it works is that a customer takes out a loan, they pay for a few months, then refinance. Principal is NOT added!!! All that happens is the principal balance they currently have is refinanced over a longer period.
    5) Wrong. Again. Principal is not increased.
    6) Are you kidding? The average loan is increasing because overall volume is increasing, and for larger initial balances.
    7) I am not your accountant. Go read the 10-K's of payday lenders and WRLD and educate yourself.
    8) When you can point to something illegal in the process of drawing down a credit line to repurchase stock, which itself may or may not raise the stock price itself, and then insiders sell out, then report it to the SEC. Not to me.

     

    You've had your chance, and I'm not impressed. You need to learn a lot more, my friend.
    26 Feb 2011, 08:21 PM Reply Like
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