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Conn's, Inc. -- Moody's upgrades Conn's CFR to B1

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Rating Action: Moody's upgrades Conn's CFR to B1Global Credit Research - 22 Apr 2021New York, April 22, 2021 -- Moody's Investors Service today upgraded Conn's, Inc.'s ("Conn's") corporate family rating (CFR) to B1 from B2 and changed its outlook to stable from negative. The company's probability of default rating (PDR) was affirmed at B2-PD. At the same time, Moody's upgraded Conn's speculative grade liquidity rating to SGL-2 from SGL-3 and withdrew the Caa1 rating on the unsecured notes due 2022 as they have been fully redeemed and are no longer outstanding.The CFR upgrade reflects governance considerations, specifically a conservative leverage policy, with recent debt reduction and revolver maturity extension leading to improved financial flexibility, good liquidity and a high overall corporate family recovery rate. With the recent notes redemption, Conn's capital structure now consists of an unrated $650 million asset-based revolving credit facility, which is secured by substantially all assets of the company, and around $465 million of asset backed notes (ABS) issued by the company's variable interest entities (VIEs).Conn's profitability deteriorated significantly in fiscal 2021 (ended January 31, 2021), and its debt-to-EBITDA increased materially, largely due to lower sales as a result of tighter credit underwriting standards and coronavirus-related restrictions and the adoption of CECL combined with an increase in forecasted unemployment rates due to the coronavirus. Profit margins deteriorated due to lower fixed logistic cost absorption on lower sales, lower repair service agreement RSA commissions and retrospective income, mix shift to lower margin products and higher allowance for bad debts associated with the adoption of new accounting under CECL, partially offset by cost reduction initiatives. However, at the same time, the company generated nearly $500 million of operating cash flow, benefitting from increased cash and third party-financed sales along with improved customer repayment rates. The company also reduced debt by over $415 million by fiscal year end 2021. Conn's has taken significant steps to de-risk the business and is now poised for profitable growth, having started fiscal 2022 with improving credit portfolio performance and retail same-store sales.The outlook change to stable reflects Moody's expectation for a return to revenue and earnings growth and improved credit metrics in 2021.The upgrade to SGL-2 reflects Moody's expectation for good liquidity following the recent extension of its debt maturity profile, including the $650 million asset-based revolving credit facility (ABL) to March 2025 and redemption of its $141.2 million unsecured notes due July 2022. With sizeable availability under its revolver and recent access to the ABS market, Moody's expects that the company will have ample liquidity to invest in growth of its business. Moody's also expects the company to maintain ample cushion under its financial covenants.Upgrades:..Issuer: Conn's, Inc..... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3.... Corporate Family Rating, Upgraded to B1 from B2Affirmations:..Issuer: Conn's, Inc..... Probability of Default Rating, Affirmed B2-PDWithdrawals:..Issuer: Conn's, Inc.....Senior Unsecured Regular Bond/Debenture, Withdrawn , previously rated Caa1 (LGD5) Outlook Actions: ..Issuer: Conn's, Inc. ....Outlook, Changed To Stable From NegativeRATINGS RATIONALEConn's B1 CFR reflects dedicated customer base and attractive product and finance offerings that offer a compelling alternative to rent-to-own, as well as governance considerations, specifically a conservative leverage policy and maintenance of good liquidity. While debt/EBITDA is currently high at around 7 times, the company's financial flexibility has significantly improved and Moody's expects a return to revenue and earnings growth, which will lead to significant improvement in fiscal 2022 (ending January 2022). Debt is typically weighted towards its credit portfolio rather than the retail segment of the business. However, due to significant repayment in fiscal 2021, this mix declined to around 41% of total debt including leases. The company's rating is constrained by its relatively small size and limited geographic breadth, with heavy reliance at present on the vagaries of the Texas economy, which despite recent initiatives, can still have a disproportionate impact on the performance of Conn's credit business.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSOver time, ratings could be upgraded if operating performance in both the retail and credit businesses improve, leading to sustained improvement in credit metrics. Specific metrics include Debt/EBITDA sustained below 5.0 times, and EBIT/interest above 3.0 times.Ratings could be downgraded if operating performance challenges persist, if financial policy decisions turn aggressive through acquisitions and/or shareholder returns, or if liquidity weakens. Quantitative metrics include Debt/EBITDA sustained above 6.0 times and EBIT/interest remaining below 2.0 times.Headquartered in The Woodlands, Texas, Conn's is a retailer of predominantly furniture and mattress, home appliances, and consumer electronics. It provides proprietary financing of its products on a secured installment loan basis which accounted for around 52% of retail revenues in the fiscal year 2021 ended January 31, 2021. Conn's operated 146 retail stores located in 15 states as of fiscal 2021, with a concentration in Texas (71, or 49%), Annual revenues approached $1.4 billion.The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Michael M. Zuccaro Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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