S&P: CNG Holdings Inc. Issuer Credit Rating Raised To 'CCC' From 'SD'; Outlook Is Negative
"The 'CCC' rating reflects CNG's significant exposure to adverse regulatory changes and its growing vulnerability to Sears Holdings Corp. for its lease finance operations," said S&P Global Ratings credit analyst Shakir Taylor. "For the next 12 months, we expect negative market dynamics within the payday industry to persist as volumes and earnings related to short-term lending will remain suppressed. We believe the company may continue to contemplate opportunities to restructure its balance sheet to offset adverse operational pressures."
On Aug. 2, 2016, CNG announced that it repurchased $68.9 million of its senior secured notes in a privately negotiated transaction, which we view as tantamount to default, since the purchase price was executed substantially below par. The company facilitated the repurchase through a new first priority credit facility containing a $25 million revolving line of credit and $100 million term loan. As a result, the company improved its interest coverage metrics, extended its debt maturities, and modestly increased leverage, measured by debt to adjusted EBITDA. Subsequent to the repurchase, CNG has approximately $332 million of the senior notes outstanding.
The rating on the company's senior notes remains unchanged at 'D' because we believe the company could continue to repurchase additional notes or execute other restructuring transactions that we view as distressed and tantamount to a default.
The negative outlook on CNG reflects our belief that weak operational performance may worsen, contingent upon final Consumer Financial Protection Bureau rules, resulting in a weaker credit profile. We view that new regulations will result in lower origination volume, initially high loan losses, higher collection expenses, and increased compliance costs. The outlook also incorporates our view of CNG's growing vulnerabilities to Sears Holdings Corp., which composes in excess of 17% of total revenues as of June 25, 2016. We expect leverage, as measured as debt to adjusted EBITDA, to remain above 5.0x for the next 24 months and EBITDA interest coverage to remain between 1.5x-2.0x.
We may downgrade the company if EBITDA to interest coverage falls below 1.5x on a sustained basis. We may also downgrade CNG if the operational performance and creditworthiness of Sears worsens and begins to jeopardize CNG's financial performance.
There is limited potential for CNG to be upgraded at this time. However, we could revise the outlook to stable if the company adequately navigates the challenges of regulatory reform and repositions itself to reduce leverage below 5x on a sustained basis.