Conn’s Appliances is returning to the securitization market for the first time since shedding $1.4 billion of delinquent and defaulted loans in September 2015 via an unrated transaction.
That transaction allowed Conn’s to pay down its existing debt and raise $380 million in cash for a product-mix transition and a share-buyback program.
Now the Houston retailer is prepping a $564 million securitization of loans that, while made to subprime borrowers, are still performing. Conn’s Receivables Funding 2016-A trust will issue three tranches of notes with preliminary ratings from Fitch Ratings. Fitch has capped the senior $423 million Class A two-year notes at ‘BBB’ due to the company’s recent history of high levels of bad consumer debt as well as a management turnover last fall.
The deal also includes Class B (expected rating of ‘BB’) and Class C (‘B’) notes sized at $70.51 million as well as an unrated, open-ended residual tranche.
The transaction benefits from 46% hard-target credit enhancement (including 41.5% CE on the Class A stack) and a principal loan balance of $705 million on more than 267,000 consumer contracts in the pool. There is also a non-declining reserve account of 1.5% of the balance, or $10.5 million.
The consumer loans being securitized have average terms of 31 months with a balance of $2,633 and carrying a weighted average interest rate of 21.54%. They were issued to underserved, low-income borrowers with an average FICO score of 611, with more than 70% within the company’s home state of Texas.
All of the loans are originated, underwritten and serviced by Conn’s, with backup servicing provided Systems & Services Technologies, Inc.
Conn’s, which derives 75% of its sales from in-house financing, has been struggling with elevated levels of delinquencies and bad-debt charge offs since late 2014. Its level of loans past due over 60 days increased from 8.5% to 10.2% by October of 2015. Those delinquencies abated slightly to 10.1% for the fiscal year third-quarter 2015 results reported in December under new CEO Norman Miller.
Conn’s carries a speculative-grade ‘Ba3’ corporate rating from Moody’s Investors Service and ‘B’ from Standard & Poor’s.