OREANDA-NEWS. S&P Global Ratings said today it lowered its issuer credit ratings on CNG Holdings Inc. to 'SD' (selective default) from 'B-'.

At the same time, we lowered our issue ratings on the company's senior secured notes to 'D' from 'B-' and revised our recovery rating to '5' from '4'. The '5' recovery rating indicates our expectation for modest (10%-30%; lower half of the range) recovery in the event of a payment default.

"The rating action follows the company's debt repurchase at prices that we believe were executed substantially below par," said S&P Global Ratings credit analyst Shakir Taylor. On July 29, 2016, the company entered into a new first priority credit facility, which consisted of a $25 million revolving credit facility and $100 million term loan. While the term loan may be used for general purposes, including the funding of new receivables, a portion of the proceeds from the term loan were used to repurchase $68.9 million of the company's 9.375% senior secured notes due May 2020.

While the new credit facility, positively, offers CNG lower interest payments (LIBOR + 600) and as a result leads to a modest improvement in EBITDA coverage, we treat debt exchanges that were executed at a large discount to par as a de facto restructuring and tantamount to default (see "Rating Implications Of Exchange Offers And Similar Restructurings, published May 12, 2009, on RatingsDirect).

We have also lowered our recovery expectations on CNG's senior secured notes to account for the effective subordination borne by secured debtholders. The revised expectation reflects the impact of the company's newly issued first-priority term loan facility, which reduces the collateral available to the company's existing noteholders in our estimated default scenario.

For the remainder of 2016, we expect negative market dynamics within the payday industry to persist, as volumes and earnings related to short-term lending will likely remain suppressed until regulatory rule from the Consumer Financial Protection Bureau begin to settle.