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."

Moody's didn't factor a second-quarter dividend payment into its latest rating action, and such a payment would be part of the ratings agency's review for a further downgrade.

"We're not only looking at improving liquidity through covenant headroom," Zuccaro said. "We're also looking at financial policies ... if they do continue to pay dividends, we'll have to factor that in."

Rent-A-Center may be looking to keep its equity investors happy after its stock took a nosedive because of disappointing fourth-quarter earnings.

The stock closed at $31.24 on Jan. 27, before the earnings announcement. The following day, it sunk 22%, to close at $24.30. On Thursday, shares finished at $24.99.

Rent-A-Center reported net earnings of $13.1 million on $769.6 million in revenue for the quarter ended Dec. 31, compared to earnings of $47.2 million on $758.4 million in revenue for the same quarter last year.

The company may need to secure covenant amendments no matter which way the dividend situation goes.

"Unless they address the covenants, compliance is very tenuous over the near-term," Zuccaro said, adding that the fixed-charge covenant is especially close. That ratio stood at 1.53 at Sept. 30, compared to a minimum required threshold of 1.35.

Moody's isn't optimistic about an improvement in the business's performance. The ratings agency noted that "[c]hallenging economic conditions continue to pressure the company's core customer, which consist of individuals that are cash and credit constrained."

Rent-A-Center listed $3.02 billion in assets and $1.68 billion in liabilities at Dec. 31.

"We continue to face meaningful headwinds in our domestic U.S. rent-to-own business, including a customer under severe economic pressure and an intensified promotional environment," said Rent-A-Center CEO Mark E. Speese in the fourth-quarter earnings report, without identifying the customer. "As a result, revenue and earnings for the fourth quarter and year ended Dec. 31 were well below expectations."

CFO Robert Davis bemoaned an "extremely disappointing gross profit miss" in the report.

In addition to its senior credit facility, Rent-A-Center has $250 million in 4.75% guaranteed senior unsecured notes due May 1, 2021; $300 million in 6.625% guaranteed senior unsecured notes due Nov. 15, 2020; and a $20 million unsecured revolving line of credit with Intrust Bank, which had $1.8 million drawn at Sept. 30.

Rent-A-Center's leverage ratio, calculated as lease-adjusted debt-to-Ebitda, stood at about 4.9 times at the end of 2013, up from 4.1 at the end of 2012, according to Moody's calculations.

Company officials weren't available to comment.

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