[DesertCat]

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I spent a little time going through the 10Q. I agree with Scorpion Man. The credit trends are alarming. Finance receivables increased about 17% year over year but delinquencies increased almost 60%?

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Delinquencies only increased 30%, and are still in the range of historical norms. Remember that the numbers you are using for comparison from last year were low by their historical standards.

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That's fishy and may indicate a relaxing of underwriting discipline to grow the loan book. The other thing that suggests competitive pressures are increasing, possibly causing management to relax underwriting standards, is that dealer discounts declined several basis points year over year.


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It's pretty evident competitive pressures are increasing. That's something that has happened cyclically in the past. And I think it's clear that some new branches did not meet their past underwriting standards this quarter.

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If unemployment picks up, it's reasonable to expect the credit statistics to get even worse.

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This is true, and a concern. But it's also reasonable for you to expect management to fix the underperforming branches, so that's going to be a positive on credit statistic trends.

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If I were you, I'd try to get my hands on NICK's credit agreement to understand the covenants and how tight they are. At the end of September, they had a maximum of $13 million of unused capacity on the line (subject to a borrowing base), and you want to be comfortable they have access to it if the credit statistics continue to weaken.

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The line of credit was put in place in 2000 when NICK had a debt to equity ratio of 3.3-1. Today it's ratio is 1.4-1. The line has been increased every time they've asked, and I have little doubt they could have it increased substantially now. I believe this risk is very small, but let's explore what happens if it occurs.

Assume the lenders panick and refuse to increase the credit line and NICK can't find another lender who will. Nick can still operate with slow growth generated by internal cash and the remaining credit line. They could also pay out around $1 a year in dividends (8.5% yield). All this assumes the credit problems are manageable.

But in an absolute worst case scenario, the problems aren't manageable, lenders demand repayment and force NICK to liquidate. NICK has $8.70 per share in liabilities, including all debt. It has $23.85 per share in cash+loans+future interest owed. Assume that 40% of the loans default over the liquidation period and average recovery is 50% (partial payments and vehicle recovery). The $23.85 total value of the loans shrinks by 20% to about $19, minus liabilities and 50 cents a share ($5m) in liquidation costs leaves shareholders with around $9.80 per share.

So in a melt down it looks like worse case scenario getting most of my money back over a 4 year period. Of course it can't be that simple. What am I missing here?