-- An Ohio district court has ruled that a type of single payment installment loan, which Community Choice Financial (CCFI) commonly offers, does not comply with the Ohio Mortgage Loan Act.
-- We are revising our outlook on CCFI to negative from positive and affirming the 'B-' issuer credit rating.
-- Our negative outlook reflects our belief that this ruling opens the possibility that CCFI and other payday lenders will eventually be unable to offer this type of loan in Ohio.
On Dec. 6, 2012, Standard & Poor's Ratings Services revised its rating outlook on Community Choice Financial Inc. (CCFI) to negative from positive and affirmed the 'B-' long-term issuer credit rating.
The outlook revision follows a ruling this week from judges in Ohio's Ninth Judicial District that a single payment installment loan offered by CCFI's competitor did not comply with the Ohio Mortgage Loan Act (OMLA). That competitor, CCFI, and other lenders in Ohio have been making loans under that act since 2008 when the state passed a separate lending act to cap the total amount and interest rate of single payment loans at $500 and 28%, respectively. Lending under the Ohio Mortgage Act effectively has allowed CCFI to circumvent those caps.
Our negative outlook reflects our view that this ruling opens the possibility that CCFI and other payday lenders will eventually be unable to offer single payment installment loans in their current form in Ohio, where approximately 20% of the company's stores are located. We are uncertain whether this case will reach the Ohio Supreme Court or whether a similar case will be heard in other district courts. However, it seems conceivable that other district judges or the Ohio Supreme Court could agree with the judges in the Ninth District.
Management has demonstrated an ability to navigate through adverse legislative environments in Ohio in the past. However, if the company is precluded from operating under the OMLA, we believe its profitability and cash flow could decline significantly.
We note, however, that CCFI's diversification and expansion strategy partially limits significant downside risks to the rating. During the past few years, CCFI's management team has successfully acquired several companies--the acquisition of California Check Cashing Stores (CCCS) in April 2011 was the largest--and improved the store-level financial performance of these companies by introducing its suite of products and operating strategies. CCFI's introduction of new products, such as title loans, installment loans, and prepaid cards, should generate higher earnings and serve as a buffer if regulation makes existing products unprofitable. Nevertheless, CCFI's business is still substantially concentrated in two states--California and Ohio--with more than 50% of stores located in those states.
The negative outlook takes into account the renewed legislative and regulatory risks in Ohio, which we believe could jeopardize the company's business. We could downgrade CCFI if it loses its ability to operate under the OMLA and, as a result, closes its stores in Ohio. We could revise the outlook to stable if the outcome of the legal issues in Ohio is favorable for CCFI. However, we believe that legislative and regulatory issues will continue to constrain the ratings.
Related Criteria And Research
Rating Finance Companies, March 18, 2004
Ratings Affirmed; Outlook Action
Community Choice Financial
Issuer Credit Rating B-/Negative/-- B-/Positive/--
Community Choice Financial
Local Currency B-
Recovery Rating 4