S&P Downgrades Rent-A-Center (RCII) to 'BB-'; Outlook Negative
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S&P Global Ratings revised its corporate credit rating on Rent-A-Center Inc. to 'BB-' from 'BB'. The outlook is negative.
At the same time, we lowered our issue-level rating on the company's secured bank facilities to 'BB' from 'BB+' and on the unsecured debt to 'B' from 'B+'. The recovery rating on the secured debt is '2', indicating our expectation for a substantial recovery (70% to 90% range, low end) in the event of a payment default or bankruptcy. The recovery rating on the unsecured debt is '6', indicating our expectation of negligible recovery (0% to 10%) in the event of a payment default or bankruptcy.
"Our lowered ratings and negative outlook reflect continued challenges in RCII's core retail business. In our view, the company continues to experience accelerated market share losses, with negative same-store sales of 12% in the core business in the third quarter of 2016," said credit analyst Olya Naumova. "We see further profitability downside potential if the company cannot successfully optimize product categories, resize its large store base, and solve various proprietary point-of-sale system performance issues that are hurting sales and margins. We also remain cautious about any continued expansion of the lower-margin Acceptance Now segment, which has grown from 6.7% of revenues in 2011 to an estimated 27% of revenues in 2016 and has been a contributing factor to the adjusted EBITDA margin erosion to 13% in the latest 12 months through September 30, 2016 from 19% at the end of 2012."
Our negative outlook reflects expectations for a continued challenging operating environment in the RTO industry that we believe will remain pressured over the next 12 months. We are also cautious about the narrowing cushion under the amended fixed charge coverage covenant that could result in another amendment and/or constrained liquidity.
We could lower the rating if competitive and industry dynamics lead to sales declines of 10% or more or if there are issues with operational execution that result in a 200-bp EBITDA margin decline. Under that example, leverage would rise to about 4x for a downgrade. We could also lower the rating if, contrary to our base-case assumptions, the company is unable to secure lasting covenant relief that ensures adequate access to the revolving credit facility.
Although unlikely given continued price competition in the industry, we could raise the rating if the company can grow revenues by more than 5% or expand gross margins by more than 150 bps through improved core U.S. and Acceptance Now segment growth. At that time, leverage would decline to below 3.0x on a sustained basis.
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