S&P: Sterling Mid-Holdings Ltd. Issuer Credit Rating Raised To 'CCC+' From 'SD' Following Debt Exchange; Outlook Negative
We are raising the debt ratings on existing senior secured notes to 'CCC-' from 'D' and assigning a debt rating of 'CCC-' to the new notes. The recovery rating for existing and new notes is '6', indicating negligible recovery (0-10% range) in the event of default.
"The 'CCC+' rating reflects Sterling's weak operating performance, its exposure to adverse regulatory reforms, which are likely to come from the Consumer Financial Protection Bureau and the Canadian government related to consumer lending, and its continuing reliance on Lone Star for capital infusions," said credit analyst Gaurav Parikh. For the nine months ending March 2016, the private-equity sponsor has contributed about $150 million and signed an agreement to inject at least $20 million annually over the next two years. The company faces headwinds from Canadian and U. S. regulations, which will further limit any growth possibility and increase its compliance costs.
The negative outlook reflects our belief that Sterling's meagre operating performance may worsen, contingent upon final consumer lending rules by the CFPB and Canadian government, resulting in lower origination volume, high loan losses, and increased compliance costs. The outlook also incorporates Sterling's growing reliance on Lone Star for funding needs to meet its operational requirements.
We could lower the rating if EBITDA coverage doesn't improve above 0.5x over the next 12 months. We could also lower the rating if we expect any new regulations to further weaken Sterling's existing business model or if the company further restructures its existing capital structure.
An outlook revision to stable is unlikely over the next 12 months even if the regulations become clearer as we do not expect operating performance to materially improve such that leverage drops below 5.0x and EBITDA coverage stays above 2.0x on a sustained basis.