S&P Revises Outlook on Rent-A-Center (RCII) from Stable to Negative
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Standard & Poor's Ratings Services today affirmed its 'BB' corporate credit rating on Plano, Texas-based Rent-A-Center Inc. (Nasdaq: RCII) and revised the outlook to negative from stable.
At the same time, we assigned a 'BB+' issue-level rating and a '2' recovery rating to the proposed $350 million senior secured term loan B. The '2' recovery rating indicates our expectation for substantial (70% to 90%) recovery of principal in the event of a payment default. We also lowered the issue-level rating on the company's existing senior notes to 'B+' from 'BB-', with a '6' recovery rating, indicating our expectation for negligible (0% to 10%) recovery.
"The outlook revision reflects the potential for a downgrade from weakening credit metrics, especially cash flow measures, and our expectation that the company's operating performance will continue to be soft for the next 12-24 months, as weakened customer demand and increasingly promotional environment continue to pressure margins," said credit analyst Diya Iyer.
The outlook is negative, reflecting our expectation that operating performance will continue to be soft for the next 12-24 months, primarily because of on-going weak customer demand and intensified promotional environment.
Downside scenario
We could lower the ratings if the company's credit ratios, especially its cash flow measures, further deteriorate. For example, we could lower the ratings if margins further decline by 200 bps with flat same-store sales, causing FFO to total debt to approach 12% or below. In addition, we would also likely reassess the company's business risk profile as weak to reflect its weakened profitability and competitive position, if the company's EBITDA and margins continue to decline.
Upside scenario
We could revise the outlook back to stable if it can grow EBITDA through international expansion and domestic Acceptance Now services, with a 10% sales increase and 100 bps in gross margin expansion. At that time, leverage would decline below 3.0x and FFO to total debt will be above mid-20%.
At the same time, we assigned a 'BB+' issue-level rating and a '2' recovery rating to the proposed $350 million senior secured term loan B. The '2' recovery rating indicates our expectation for substantial (70% to 90%) recovery of principal in the event of a payment default. We also lowered the issue-level rating on the company's existing senior notes to 'B+' from 'BB-', with a '6' recovery rating, indicating our expectation for negligible (0% to 10%) recovery.
"The outlook revision reflects the potential for a downgrade from weakening credit metrics, especially cash flow measures, and our expectation that the company's operating performance will continue to be soft for the next 12-24 months, as weakened customer demand and increasingly promotional environment continue to pressure margins," said credit analyst Diya Iyer.
The outlook is negative, reflecting our expectation that operating performance will continue to be soft for the next 12-24 months, primarily because of on-going weak customer demand and intensified promotional environment.
Downside scenario
We could lower the ratings if the company's credit ratios, especially its cash flow measures, further deteriorate. For example, we could lower the ratings if margins further decline by 200 bps with flat same-store sales, causing FFO to total debt to approach 12% or below. In addition, we would also likely reassess the company's business risk profile as weak to reflect its weakened profitability and competitive position, if the company's EBITDA and margins continue to decline.
Upside scenario
We could revise the outlook back to stable if it can grow EBITDA through international expansion and domestic Acceptance Now services, with a 10% sales increase and 100 bps in gross margin expansion. At that time, leverage would decline below 3.0x and FFO to total debt will be above mid-20%.
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