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Cash Store wearing out welcome with investorsPeter Power/The Globe and Mail

Short-term lender Cash Store Financial Services Inc. is fast losing friends in credit and equity markets after a series of dividend cuts, disclosures of ineffective internal controls around loan losses, and the apparent overpayment for a portfolio of loans.

Mutual fund company Montrusco Bolton took the drastic step Thursday of starting a public campaign for changes at Cash Store, saying "enough is enough" after the stock fell by more than half in the past year and dividends vanished.

On the bond side, Standard & Poor's cut the company's rating and said that the outlook remains negative.

A read of the S&P release is troubling. The growth that was expected is not there, and new regulations on short-term lending – often referred to as "payday loans" – are more restrictive than forecast. The result is that operating margins fell 32 per cent last year from 2011.

What is perhaps more striking is what the company has revealed about its internal controls in 2012, with S&P summing it up as "the company noted that it did not maintain effective accounting processes and controls related to measurement of provisions for loan losses, premium paid to acquire the loan portfolio, intangible assets, and consumer loan receivables."

So in other words, a company's whose job is to lend is not doing a good enough job measuring its success at collecting loans, or valuing loans when it buys them. Cash Store issued $132-million in bonds to purchase a loan portfolio; that portfolio is now held at a fair value of $50-million.

S&P said its "negative outlook is based on uncertainty with respect to CSF's governance and accounting related to the acquisition of loan receivables."

What's interesting is the loans were made by Cash Store, but held off balance sheet before the purchase. Yet Cash Store seems to have overestimated their value.

That is not a promising sign about management's ability to judge the likelihood of collecting on loans.

Now, the company has a special committee of the board reviewing the purchase, and S&P says that could "distract the management team."

Speaking of distractions, Montrusco is calling for the company to retrench to Canada by looking at selling its U.K. stores, seeking the separation of the roles of chairman and chief executive officer, and the delisting of shares from the New York Stock Exchange to save money. (The company would still remain listed on the Toronto Stock Exchange.)

Those items are now on the agenda for a shareholder vote at the company's annual meeting Feb. 7.

Montrusco bought the stock expecting an increase from earnings as the company's expansion took root, and as new products drove more earnings at each new branch.

It has been a "disappointment," Montrusco portfolio manager Behrak Shahriari said in an interview, and the company is weak at communicating with investors, he said.

The most recent example was Cash Store's decision to eliminate its dividend, which was announced only during a conference call on Jan. 2. There was no press release.

"This is the management transparency you have at Cash Store," Mr. Shahriari said. "I'm not the oldest guy on the Street, but I've never seen that."

Cash Store chief financial officer Craig Warnock said in an e-mailed response to questions that the company disagrees with all three initiatives proposed by Montrusco Bolton, and "at this point, it is up to shareholders to weigh the arguments."

Beyond the annual meeting, one other date looms large: 2017. That's when the company must repay its bond issue.

At the moment, it has $19-million in cash and provided by operating activities was $12.3-million in the most recent year, so the company may need to look outside for refinancing.

Lenders looking at what happened to the money from the last bond issue, and the issues around corporate controls, are going to be wary about giving Cash Store more.

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