Live From the Desk 8

An IPO Announcement (with potentially more to follow)

Despite the headlines as of late, there have been positive developments that are flying under the radar. An example of this is the plans for an IPO, just filed on Tuesday, for a bond that we hold.

One of the investment theses that we have talked about this year is a focus on cash flow businesses. We have written about our positions in the bonds of cheque cashing stores and how we like their stable, cash flow businesses unaffected by market gyrations. The business channel exists because the banks aren’t interested in it and with regulations now in place, it is an interesting space to invest in.

These companies traditionally funded themselves through a network of high net-worth investors who provided capital at a 20% annualized interest rate. With new regulations in most states and provinces, the markets opened up and no less than four large cheque cashing companies issued bonds in the first half of 2011, with coupons ranging from 10.5%-11.0%. This was a win-win for the companies and investors, as the companies lowered their cost of capital and the investors received a nice return on their investment.

Fast forward to this past Tuesday, when Community Choice Financial Inc. (owners of CheckSmart in the US, www.ccfi.com) filed to sell $230m in stock through a Nasdaq IPO to fund potential acquisitions and repay debt. The bond indentures allow for 35% of the issue to be “clawed back” or bought back at a price of $110.75. The issue was $395m, so we expect that $138.25m of the $230m will be used to pay down debt, an extremely positive catalyst. The company is currently only levered 3.5x EBITDA/EV, something we think on it’s own should warrant an upgrade from B- to at least B+, but, if they can get this equity issue done, the leverage should decline further to 2.2x EV/EBITDA. Their EBITDA has been a stable $102m over these last twelve months. This reduction in leverage should lead to an immediate price appreciation (risk reduction) in our bonds.

Of course, the big “if” is whether or not they can get an IPO done in this market. It’s positive that they are moving in the right direction and we hope stable markets will open up an IPO window to get this done. If they can launch a successful IPO, look for the other bonds we own in the space to follow in their footsteps, just as they did in the new issue bond market. We think it’s a great opportunity to own these high yielding bonds which offer a great risk/reward, with a catalyst to boot. All of the other bonds have similar “claw backs” to the Community Choice bonds.

We also own these bonds in the Vertex Fund, taking advantage of the potential price appreciation catalyst.

until next time. . .

@The Vertex Team

For information on this update or the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)
604.408.5660

Michael Lindblad
(Central and Eastern Ontario)
416.200.4457

James Wilson
(Central and Western Ontario, Maritime Canada)
519.902.7780