S&P Affirms Ratings on World Acceptance (WRLD) Following NORA Letter

Standard & Poor's Ratings Services said that yesterday it affirmed its 'B+' issuer credit rating on World Acceptance (NASDAQ: WRLD). The outlook remains negative.

"Regulatory risk has escalated for World Acceptance and other nonbank finance companies that target the deep subprime sector of consumer finance," said Standard & Poor's credit analyst Shakir Taylor.

On Aug. 7, World Acceptance received a Notice and Opportunity to Respond and Advise (NORA) letter notifying the company that the CFPB Enforcement Office is considering legal action against the company based on possible violations germane to the Consumer Financial Protection Act of 2010.

The announcement follows a regulatory probe, which originated in March 2014 with a Civil Investigative Demand that the CFPB issued to investigate practices related to World Acceptance's unsecured lending and collections operations. The company believes that its marketing and lending practices are lawful and intends to make a NORA submission to the CFPB.

While the timing and the magnitude of the potential enforcement action is unclear, we believe that it could hurt World Acceptance's profitability. The company may have to pay a fine and may also have to adapt certain aspects of its lending or collection practices in a manner that could reduce origination volumes.

The negative outlook reflects the unresolved status regarding the company's NORA letter from the CFPB and our view that the company remains highly exposed to regulatory and operational risks, which are likely to intensify and may hamper volume and profit growth within the next two years.

We could lower our rating if the company does not demonstrate an ability to diversify its funding sources in advance of the initial step down on its revolving credit facility. We may also lower our rating on World Acceptance if regulatory, legislative, or operational obstacles cause a significant decline in earnings, cash flow, or tangible equity to levels that would begin to bring its compliance with existing covenants into question or raise its leverage above a debt-to-adjusted total equity ratio of 2.75x.

We may revise the outlook to stable if the company is able to successfully diversify its funding sources without significantly weakening margins and prove its ability to navigate through impending regulatory hurdles. This would be evidenced by the company's growth while maintaining conservative leverage, strong profitability, and resiliency against the recent surge of new consumer lending entrants.

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