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Rent-A-Center, Hoping to Pay Dividend, Will Refinance

NEW YORK (The Deal) -- Rent-A-Center  (RCII) announced Thursday it intends to refinance its senior credit facility with $850 million in new debt, as the largest rent-to-own business in North America tries to boost its financial position and get the go-ahead to pay a shareholder dividend amid concerns over its performance, liquidity, and debt covenant compliance.

The Plano, Texas-based company, which allows customers to lease products such as electronics, appliances, furniture and accessories under rental purchase agreements with no long-term obligation, hopes to replace its existing $687.5 million credit facility with a $350 million term loan and a $500 million revolving credit facility.

Rent-A-Center said it wants to arrange the new financing by the end of this year's first quarter. The company said it plans to repay the $348 million outstanding under its existing senior credit facility with proceeds from a new term loan.

The current senior secured credit facility, which matures on July 14, 2016, has two parts: a $500 million revolver with $212.5 million drawn as of Sept. 30, and a $250 million term loan. The interest rate on that facility is either prime rate plus 0.5% to 1.5%, or Eurodollar rate plus 1.5% to 2.5%.

Moody's Investors Service expressed concerns about Rent-A-Center's liquidity in a Feb. 4 report that issued a downgrade to Ba3 from Ba2, and the new debt financing plan would provide more flexibility.

"They are increasing their debt slightly to provide more liquidity," Moody's analyst Michael Zuccaro said Thursday by phone.

He warned that, due to poor financial performance, a mere $42 million in cash on the balance sheet, and an expected cash outflow of up to $100 million in 2014, "they'll be highly reliant on their revolver, and on top of that, their covenant cushion has deteriorated significantly."

Another motivation for the refinancing effort is to make it possible for Rent-A-Center to pay a shareholder dividend during the second quarter.

"Given non-compliance with its incurrence covenants, the company is restricted from paying dividends at this point because of its leverage," Zuccaro explained.

The company's Thursday statement said that it "anticipates obtaining from its existing lenders a waiver under its existing credit agreement to permit the declaration and payment of a dividend for the second quarter of 2014, subject to approval by the Company's board of directors."

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