World Acceptance May Face Legal Action; Janney's John Rowan Thinks It's No Longer A Buy

In a report published Tuesday, Janney Montgomery Scott analyst John Rowan downgraded the rating on World Acceptance Corp. (NASDAQ: WRLD) from Buy to Neutral, with a fair value estimate of $38.

Analyst John Rowan mentioned that World Acceptance had received a Notice and Opportunity to Respond and Advise (NORA) letter from the CFPB, indicating that the agency was "considering" legal action against the company. The letter was an "an unwelcome escalation of the investigation that the agency launched in March 2014."

The latest action had changed the dialogue between the two entities from an inquiry to "an accusation of wrongdoing," Rowan pointed out. World Acceptance had not indicated specifics of the NORA letter, or what exactly the company was being accused on doing that was in violation of the Consumer Financial Protection Act of 2010. "We expect that the company and the CFPB will negotiate a final settlement within months," the analyst said.

In the report Janney Montgomery Scott noted, "At best, this process will result in a small fine (assuming a minor infraction); if however, there was some kind of systematic illegal corporate policy which results in a more significant legal action (e.g., a cease and desist, stay or restraining order), the company's lenders could technically force a foreclosure on the revolving credit facility."

Rowan added that World Acceptance had $501 million outstanding on the revolving credit facility and approximately $125 million in annual free cash flow, and the company would not be able to "pay back this facility in a timely fashion without a dilutive equity issuance."