If you have ever reviewed bulk landlord lawsuits for eviction or rent and possession, you will notice many exhibits attached containing “Moneygram” payments. If you are not familiar with Moneygram, it is a domestic money order company that functions like Western Union.
If you don’t have a bank account and need to pay your $700 monthly rent, you find a moneygram location near you and then turn your cash into a money order that can provide a form of verifiable payment to your landlord. It’s one of the leading providers of verifiable funds in low-income communities.
I tend to ignore the Moneygrams and Western Unions of the world as a potential investment candidate, mostly because I believe the core model is ripe for disruption. If you are a political dogooder, removing the exorbitant fees from the everyday financial transactions of the poor seems like an obvious source for corporate altruism (which Facebook is taking aim at with the launch of its own cryptocurrency Libra).
Nevertheless, I have evaluated Moneygram as an investment candidate because it does have a dominant niche with rent money orders. When I read through the annual report, the first thing I noticed is that the company was losing about $30 million per year even though its profits should have been around $25 million per year.
What’s the problem? As noted on page 37 of the Moneygram International 10-K (2018), it is sitting on $904 million in debt. More specifically:
“As of December 31, 2018, the Company had an outstanding balance of $904.4 million on its senior secured borrowings. The Company’s effective interest rate on senior secured borrowings increased from 4.94% as of December 31, 2017 to 5.59% as of December 31, 2018.” In other words, the $50 million in interest payments on its massive debt load is more than double the amount of what its annual profits would have been if it were a debt-free company.
And to make matters worse, Moneygram’s borrowings are structured as a balloon payment that is due within the next year.
Moneygram stock-focused forums are filled with people who talk about how easy it is to restructure debt in this environment and that bondholders won’t wipe themselves out so of course they’ll refinance. I’ve even seen some quote the Donald Trump line that if you owe the bank a million dollars, you have a problem, but if you owe the bank a billion dollars, the bank has a problem.
Out of anything in the world that you can invest in, why would you invest in a company that actually requires an affirmative act of mercy to continue with the status quo? I don’t think you could claim that the price was so compelling that it required investment. Even if it were debt-free, I wouldn’t want to pay more than 20x the hypothetical $20-$25 million in profits. At most, it could be worth $500 million without debt. But it carries over $900 million in 5% that is immediately due and owing. Paying a penny per share is too much when the net worth of the business has a negative value.
Moneygram stock fell from $286 in 2006 to the single digits because it cannot handle its extreme debt load based on its current business model. I think some speculators just love the thrill of being near the possibility of wipeout. Earlier, Moneygram launched a partnership with cryptocurrency Ripple and took in a $50 million investment from it. The stock rose from $1.44 to $3.88, pushing the valuation of the company to $218 million.
Why do I think Moneygram did this? To induce the bondholders to refinance the debt into equity. Moneygram management ought to know that it cannot become healthy with its current debt burden because the interest alone is double its cash flow from operations. The money is due soon, and usually, lenders would only extend the maturity if they could get a higher interest or some type of one-time compensation, which Moneygram would be unable to meet because it can’t even handle 5.59% interest rates.
It needs to get those bondholders to trade in their debt for shares of stock. The problem is that there is about 4.5x as much debt outstanding as stockholder equity, so the amount of dilution would be extreme if it were to occur. And that is no sure thing, as a sophisticated debtholder might prefer dragging the company into New York’s Southern District for bankruptcy to wipe out the shareholders and emerge with the company all their own. Why share the pie when the bankruptcy code lets you have all of it?