Furniture, electronics and appliance retailer Conn’s is heading to market with its second securitization of subprime consumer loan receivables pooled from its still-troubled credit portfolio.
Conn’s Receivables Funding 2016-B is comprised of three tranches of notes sized at $552.78 million, including $391.84 million in Class A notes receiving a provisional ‘BBB’ rating from Fitch Ratings. Fitch has capped the senior notes because of Conn’s higher loan defaults, management changes and credit-risk profile deterioration in recent years.
In its new transaction, Conn’s is increasing the credit enhancement support to 45.5% for the Class A notes, compared to 41.1% for the Conn’s Receivables trust’s previous 2016-A transaction.
Fitch is assuming a higher base-case default rate of 24.75% compared to the 2016-A pool that was 23.25% - with its decision “reflecting the high absolute value of the historical defaults, along with the variability of default performance in recent years and the high geographic concentration” of loans in its home state of Texas, according to a presale report issued Tuesday.
Also being issued are $111.96 million in Class B notes and $49.98 million in Class C notes.
The notes are backed entirely by a static pool of $699.7 million in subprime fixed-rate loans originated in-house by Conn’s, which depends on internal financing to achieve 75% of its store sales. At the Aug. 31 cutoff date, the trust had 262,974 loans in the collateral pool with an average balance of $2,661. The borrowers in the pool have a weighted average FICO score of 608.
Apart from the CE levels, Conn 2016-B compares with much of the structure of the trust’s 2016-A transaction, which pooled $705 million behind a $564 million notes issuance. That transaction was the first since Conn’s sold off $1.4 billion of delinquent and defaulted loans last September, clearing its books of problem loans and raising $380 million in cash.
The company has also narrowed the number of promotional accounts in its latest pool, comprised of only 42.6% of the loans having limited-time interest-free provisions, compared to 54.7% of the loans in the 2016-A transaction.
Loans in the new collateral pool are all current, according to Fitch.
Conn’s reported a net loss of $11.9 million and increased provisions for bad debts to $60 million due to a stricter methodology in calculating its “doubtful” accounts, according to its latest quarterly earnings report issued earlier this month.
Conn’s is planning on increasing the rates it charges for future loans, through a new direct-loan program it will have in place at its 55 Texas locations by the end of the year. The new program (which needed regulatory approval in Texas) will boost the average APR of its credit products to 30% from the average 21% level for existing loans – including those collateralized its pair of 2016 asset-backed transactions.