Furniture, electronics and appliance retailer Conn’s is marketing another $469.83 million of bonds backed by subprime consumer loan receivables.
Conn’s Receivable Funding 2017-A will issue three tranches of notes with preliminary ratings from Fitch Ratings and Kroll Bond Rating Agency: $313.12 million of Class A notes are rated BBB/BBB, $106.27 million of Class B notes are rated BB/BB- and $50.34 million of Class C notes are rated B-/B-. There is also an unrated tranche of notes to be retained in order to comply with risk retention.
Beginning in fiscal 2013 Conn’s began an effort of store expansion within and outside of its home state of Texas and simultaneously raised their risk tolerance for new originations, which created an increased level of defaults, particularly for borrowers who had been customers of Conn’s less than 360 days.
As a result, Fitch caps its ratings for the senior tranches of deals at BBB.
The 2017-A trust pool consists of 100% fixed-rate consumer loans originated and serviced by Conn Appliances, Inc. The credit characteristics of the pool are similar to those of Conn’s previous two deals, completed in 2016, with a weighted average FICO score of 606 and a weighted average borrower rate of 26.66%, and a heavy concentrations of loans in Texas, which represents some 66% of the pool.
Also, the percentage of accounts with promotional, interest-free periods dropped slightly to 41.5% from 42.6% in the previous deal. The "cash option" promotion "reverses" interest payments for customers who make all minimum required payments and pay off the balance completely within the defined period (12 to 18 months). These payments are then considered to be principal payments.
In its presale report, Kroll notes that, historically, 35% of all borrowers using this option satisfy the requirement, which can result in reduced excess spread for the transaction. However, borrowers using the cash option are also historically less likely to default, and defaults have a far more negative impact on excess spread (the difference between interest earned on the loans used as collateral and the interest paid on notes issued by the trust.)
Fitch’s base case default rate for the 2017-A pool of 24.25%, down from 24.75% in its previous deal in October 2016 but up slightly 23.5% from the March 2016 deal.
However, the target overcollateralization that must be reached before any excess spread can be released has been reduced to 35% from 40% in the October deal. In its presale report, Fitch said this is the primary reason it expects to assign a lower rating to the Class C notes.
