Australia is taking the payday loan industry seriously.
On Monday, the Australian Securities and Investments Commission (ASIC) announced Monday it has suspended the credit license of PAID International Ltd, a payday loan lender. The suspension will be in effect until April of next year.
According to the government body, the suspension was implemented because the company, previously known as First Stop Money, had been insolvent and ceased providing any payday loans. Leadfish, a subsidiary of PAID, also had its credit license canceled by ASIC. Both of these firms collected “leads” and provided loan matching services through websites online as well as retail store fronts.
Reports say that an external administrator had been appointed earlier this year and the firm continued to trade. The company then entered into a deed of company arrangement (DOCA).
In October of 2014, the administrator had agreed to replay close to $1 million to more than 6,000 customers who had paid excessive fees on about 20,000 loans for bad credit. To this date, PAID has refunded nearly half a million dollars of that money to consumers as part of an agreement with ASIC.
Regulators to Payday Loan Industry: You’re on Notice
This past spring, the ASIC released a report that concluded payday loan lenders needed to improve compliances with various important consumer protection laws. Regulators say that payday lending firms are not meeting the new rules and obligations that were introduced in 2013.
According to the organization’s review of 288 consumer files from 13 payday lenders, many lenders participated in practices that may have breached responsible lending regulations. These 13 payday lenders account for three-quarters of payday loans.
Peter Kell, ASIC deputy chairman, stated that the payday lending business has been put on notice to better its business practices. Otherwise, enforcement will be “inevitable” and it will put a strain on the industry.
“ASIC’s particular focus on payday lending is part of our wider scrutiny of the broader consumer credit regime, which takes on banks and other non-bank lenders,” Kell said in a statement. “Our actions demonstrate ASIC’s commitment to address particular consumer credit risks in our market.”
When digging deeper, the ASIC said that the biggest potential compliance risks are found in tests for loan suitability. In other words, many payday loan storefronts aren’t conducting thorough background checks to find if customers have multiple payday loans or faces possible default under a payday loan.
In addition, the ASIC also reviewed concerns in the realm of payday lenders establishing their rate terms at 12 months or more. This means customers are charged with more fees, even when some customers asked for shorter terms or to pay back the loan in a shorter period of time.
The ASIC has put out warnings. A few months ago, The Cash Store, a bankrupt payday lender, was slapped with a record $19 million fine by the Federal Court for violating consumer credit laws. It turned out to be the biggest civil penalty obtained by ASIC.
Overall, the ASIC believes the industry needs to boost its standards.
Leverage is a tough aspect to evaluate for a commodity producer. While conventional debt ratios are helpful in determining the capital structure of a company like BHP Billiton, we need to be able to put that kind of information into perspective, so as to be able to come up with a reasonable conclusion from the research. This article is going to help demonstrate a framework for doing such an analysis, and help readers to understand how to different financial metrics can be used to assess the various impacts of a company’s debt load.
The first step to evaluating the capital structure of a company like BHP Billiton is to look at how it is that the company’s nominal debt load fills up the balance sheet. With a debt-equity ratio of nearly 1, a current ratio of nearly 1, and a quick ratio of .65, we can see that the company is reasonably solvent at this point in time. To put these numbers into perspective, the company could pay off nearly off of the year’s debt obligations without selling another ounce of product, and more than half of those liabilities off immediately if a solvency event occurred.
Combining this information with the way in which the company earns nearly twice the amount of the nominal obligations remaining over the course of a year, the company could reasonably become debt free over the course of 1-2 years if it was to begin liquidation. This illustrates the safety of the company, and how it is that the company’s large volume of assets greatly outweighs its debt obligation. Given that the company is also carrying an interest coverage ratio of 31x, and maintains a cash flow-to-debt ratio of .39, we can see that the company’s capital structure tends to favour a conservative balance for the time being. That being said, given the company’s apparent tendency to be on the hunt for acquisitions over the year, we can start to evaluate how it is that the capital structuring of BHP Billiton might actually provide us with an indication of an investment opportunity.
Understanding how it is that BHP Billiton is currently covering an almost excessive amount of its current debt load off with its existing operating incomes, and has an extensive asset base against which it could borrow, we need to begin asking ourselves about whether or not this is a state of equilibrium for the company’s capital structure, or if it is indicative of the company’s next corporate action. In this situation, BHP’s recent history of going on an acquisitions hunt suggests that the company still has room to continue buying up companies and assets for their resource properties. This conclusion is then further supported by the way in which the company was actually preparing to make a major acquisition in Canada over the year, but had the proposal vetoed by the Federal government.
This left BHP with an additional $300million in debt capital that was prepared, but never issued to complete the transaction. That being said, if BHP’s management team supported the issuance of $300million worth of additional acquisitions (which would increase the company’s asset book value by a respectable amount), it stands to reason that they would again be willing to pursue such a degree of debt to financing their further expansion. Given that the company then proceeded to maintain a fairly clean balance sheet , rather than taking steps to use the offered debts to buy-back shares and improve the company’s leverage against its existing asset base, we can see how it is very possible that the company is keeping itself in a position to continue making acquisitions over the coming years.
Granted, such an evaluation only covers the analysis of the company’s ability to continue making purchases into the future in broad strokes, it provides us with a framework to use when looking at how it is that companies made capital structuring decisions. From here, we could then delve into the managements discussion notes and earnings call information to look for confirmation of an acquisition-friendly strategy going forward.
It seems television advertisements for payday loans can be found anywhere and everywhere in Great Britain. If you think you and your family are being bombarded with payday loan advertising then you’re correct, at least according to a new study published late last month.
Telecommunications regulator Ofcom found that the number of television ads for payday loans online has astronomically increased by 3,500 percent. The study discovered that firms, such as Wonga, the largest payday loan lender in the country, are targeting their advertisements to impoverished households with children and families that have been significantly hurt during the global economic downturn.
In 2009, there were only 11,000 payday loan ads broadcasted on television. Two years later, that number skyrocketed to 243,000 and then a year later it went up again to 397,000. This led to a jump in viewership: 12 million views in 2008 to 7.5 billion views in 2012. This accounts to roughly 152 views per person – the average low-income individual saw it about 203 times.
Furthermore, according to the organization’s report, youth were also targeted. The average four- to 15-year-old viewed these payday loan advertisements 70 times in 2012 alone and roughly three percent of the ads were displayed during children’s programming. This doesn’t sit well with Gillian Guy, CEO of Citizens Advice, a consumer watchdog and community organization.
“Payday lenders are unashamedly and irresponsibly using adverts to prey on poorer households in a bid to capitalise on the cost of living crisis,” Guy said in an interview with the Daily Mirror. “They should not be targeting children and teenagers with adverts. It is deeply concerning that children and teenagers were exposed to three times as many payday loan ads in 2012 compared to in 2010. More and more adverts are appearing on music channels and TV stations popular with teenagers and young people as lenders try to entice the next generation of borrowers.”
Assistant general secretary Steve Turner, meanwhile, warned that this will cause children and young people to embrace the “culture of debt” in the future.
“It is not just children being infected by a payday loan culture – research shows people are borrowing £660 a month just to pay for food, housing and heating,” Turned added in his remarks.
The issue has become quite ubiquitous and now the Business, Innovation and Skills Committee (BIS) are urging Members of Parliament to ban payday loan advertisements during children’s programming after listening to testimony from consumer advocates.
Wonga disagrees with the research and says that its advertisements toward children are nothing but a “myth,” reports the London Telegraph.
“The idea that Wonga advertises on children’s TV channels or programmes is a myth. We have a strict, long-standing policy not to advertise in this way,” a Wonga spokesperson told the British news outlet.
Members of the Consumer Finance Association (CFA), such as Cash Converters, The Money Shop and Quick Quid, say they do not advertise to children.
In 2012, the payday loan industry was valued at £2 billion, up from $900 million four years ago.
BHP is an international mining company based out of Australia, with a global operational presence. Specifically, they have begun increasing their exposure to North American assets, with petroleum production as a key area of growth.
By focusing on a strategy of growth-by-acquisition over the last few years, a cursory overview of basic financial ratios would initially suggest that the company’s ability to create returns for investors into the future is deteriorating quickly. However, by digging into the underpinnings of these ratios, we can determine that there might be more going on behind the scenes than would be initially suggested by the basic metrics, and therefore an opportunity for investors to jump in on a company that has just finished taking a bath on its intangible expenditures to save on tax expenses over the year.
Over the last two years, all off BHP’s Return on Equity, Return on Asset, and Earnings per Share metrics have declined dramatically, by approximately the same amount. While this is initially concerning, it is interesting to notice how it is that the decline in value all mainly stem from goodwill write-downs, increased financing costs from acquisitions, and various 1-time expenses. The end result is a situation where the company’s 1-year return metrics will be dramatically reduced on a non-operating basis, but will very likely bounce back in the following reporting period due to the non-continuing nature of the write-downs made.
In this specific situation, BHP wrote-down the value of the goodwill it paid for on a couple of properties that it acquired when commodity prices were higher. Since commodity prices are now lower, it is justifiable that the company will no longer be able to get the same amount of revenues out of the assets as they would have been able to with the higher prices, and therefore the company takes an intangible loss. This loss reduced tax expenses for the year, and reduced asset values, but didn’t really do much more than that because the company already paid for the assets purchased.
So what does this mean in plain English?
It means that the company is taking a hit this year, and likely going to bounce-back later in the year, because the properties it owns are still chugging away, and it’s still on track to continue putting the newly acquired assets (which have just been written down) into operations. Even with lower commodity prices, the company is still profitable, and capable of scaling its operations in a way that create returns for investors.
Assuming that the stock price of BHP today is representative of a set of temporarily reduced ROE, ROA, and EPS metrics, we can now come up with a set of hypothetical numbers illustrating what BHP’s stock price should be in the event of a correction. For the sake of conservatism, this calculation will assume that the company’s profitability metrics recover by half of what they used to be. Combined, the ROA and ROE metrics are suggesting the need for a $20-30/share increase in price, while the minimal change in the EPS metric suggests a possible change of $25-35/share. The key takeaway here is then to recognize how it is that, with all other metrics held constant, the share-price of BHP Billiton has a reason to be above its current price point.
In the last article we took a look at how it is that an investor could take on exposure to 6 individual securities to create a level of exposure to the gold industries that would be similar to building up a portfolio consisting of equal holdings across 5 different mutual funds. The conclusion made was that these 6 securities represent the back-bone of gold mutual funds, and can be used as a back-bone for our own personalized investment portfolio that doesn’t cost expensive management fees.
From there, we can start to look at how it is that this portfolio can be further diversified to create a high-quality investment portfolio that takes advantage of world class management. That being said, remember that this article is here to serve as an example of what kind of options you have available to you as a personal investor. Talking to an adviser about investment strategies you read about online is always the best way to go.
The first step to building up an individualized gold portfolio to determine how much of it should be composed of reasonably safe assets, and how much should be built up of assets that create ‘excess’ return (ie. undervalued assets that have greater volatility, and will generally outperform the back-bone assets over an extended period of time). In general, portfolio theory suggests that we should do at least 50% of our capital into the back-bone assets in this particular situation, because of the way in which this grouping of gold stocks will actually be included in a personal portfolio that contains a variety of other assets.
From there, we can go anywhere up to 80% or 90% of the assets into this portfolio, depending on risk tolerance. Remember, these main securities will actually represent a good indication of the industry’s actual returns, and could realistically be held on their own to create reasonably measured exposure to the gold industry. Upon determining the amount of lower-risk assets to put into the portfolio, we can now differentiate our overall position from the passive mutual fund by building up the ‘excess return’ portion of the portfolio.
The second part of a personalized gold investment portfolio should be composed entirely of assets that are undervalued by the market, and presenting long-term growth potential that will exceed the market returns of the industry. As a general rule, this means that it will be composed of small, junior-producers that are developing a resource base with a great deal of potential, but require time and capital to develop. These growth stories are particularly volatile over the short term, are not particularly liquid, require a greater investment time-horizon, and require a great deal of investment expertise to identify.
That being said, if the gold industry does well over the long term, these companies will perform the best, so we want exposure to them. Since we have already minimized our portfolio costs by buying 6 back-bone securities, we can place the remaining of our funds in an actively managed specialty fund that focuses in on investing exclusively with junior production companies, and has a reputation for being directly involved with the companies they finance. These funds invest exclusively in the kinds of undervalued assets that create returns on the long term, whereas our previous mutual fund options would have simply indexed their smaller positions to a large number of potential candidates and managed the positions passively.
The end result is the creation of a portfolio that will replicate the returns of the greater mutual fund industry in the gold industry, while maintaining best-practice exposure to the expertise of world-class fund managers pursuing value and growth in the juniors space. While we still need to pay a management fee on the juniors fund, it is interesting to notice how this cost will usually balance out against the savings in the back-bone portfolio, meaning that we’ll be paying the proportionately same amount in fees, for a greater level of service.
Gold investment strategies have enjoyed a particularly glamorous investment discussion over the year. Between the huge volatility implications of macro-economic trends, and the micro-economic challenges of producing companies creating returns for investors through their resource bases, and the financial issues surrounding a emerging difference between demand levels for physical and ‘paper’ gold, investors have spent the year juggling around a variety of different gold-related asset classes to try and maintain their exposure to the precious metal.
From the perspective of a personal investor, we can see how it is that the mutual fund industry provides us with the best opportunity to access this kind of exposure because of the way in which the provision of diversification and scale keeps things affordable on an individual scale. However, with hundreds of mutual fund options available to us, all of which with similar holdings and return profiles, it can be hard to decide which fund we should buy into. With the help of a little bit of number crunching, this article is going to illustrate an alternative option for investors that allows them to invest directly into gold stocks in a way that replicates a portfolio of mutual funds, without as much cost. From there, we can take steps to diversify the portfolio on our own to suit our own investment profile.
In reviewing the top 5 gold mutual fund performers with a reasonably long history of operations (symbols of: EKWYX, OGMNX, TGLDX, IGDYX, FGAPX), we can notice right away how it is that each of these funds has anywhere between 43-57% of its entire portfolio invested into its top-ten holdings. While these funds are holding more than 50 equities each, the fact that we are paying somewhere around 1.5% in management fees per year for such a heavily weighted portfolio brings up some questions about what it is exactly that we’re paying for. Given that these funds are putting such a large weighting on their top-ten holdings, we can take another step to determine just how important fund managers feel that these positions are by comparing them all together to see what a portfolio of all of the top-ten holdings of these five mutual funds would look like, to see if there are any trends that emerge.
If we were to create a stock portfolio of all the top-ten positions of the 5 mutual funds examined into this study, and weighted the holdings accordingly to how it is that each fund has placed the individual holdings in their own portfolios, we’d notice that the effects of the over-weightings actually stack. What we can essentially see here is that mutual fund managers in the gold industry are not only heavily weighing their funds in favor of their top-ten holdings, but they are all choosing the same individual securities as being their favorites.
With respect to our above 5 mutual funds, a portfolio of 6 individual equities would actually represent an extremely similar profile to what the portfolio of mutual funds would demonstrate (symbols: GOLD, GG, ABX, EGO, NCMGF, NEM). What’s more, if we look at the average returns of the mutual fund portfolio against these 6 securities, we can see that the mutual fund portfolio lost 33% over the last year (remember, this is because gold just took a bit hit from Europe recently), and the securities portfolio only lost 27%. While this isn’t really a thorough evaluation of the scope of the returns, it does provide an indication that we might be looking in the right direction with this train of thought.
So what does all of this information mean? It means that mutual fund managers in the gold industry all seem to believe that these 6 securities represent a very strong back-bone for a gold portfolio, to the point at which they are representing a great deal of their portfolios with these securities. Assuming we can purchase these securities with a $5/lot brokerage fee, it means that an investor with more than $2,000 is in a position to consider building up their own personal portfolio of these 6 securities as opposed to buying into a mutual fund, because of the way in which the cost/return profile works out in their favor. From there, the investor can further diversify themselves to create their own personalized gold investment portfolio, at a lower cost, and with a greater flexibility than had they gone with a straight mutual fund.