CONNS INC - 10-Q filing on 2018-06-07

Debt and Capital Lease Obligations

3 Months Ended

Apr. 30, 2018

Debt and capital lease obligations consisted of the following:



(in thousands)	April 30, 2018			January 31, 2018
Revolving credit facility	$	147,550		$	77,000
Senior Notes	227,000			227,000
2016-B VIE Asset-backed Class B Notes	—			73,589
2017-A VIE Asset-backed Class A Notes	4,171			59,794
2017-A VIE Asset-backed Class B Notes	106,270			106,270
2017-A VIE Asset-backed Class C Notes	50,340			50,340
2017-B VIE Asset-backed Class A Notes	188,997			292,663
2017-B VIE Asset-backed Class B Notes	132,180			132,180
2017-B VIE Asset-backed Class C Notes	78,640			78,640
Warehouse Notes	22,321			—
Capital lease obligations	4,696			4,949
Total debt and capital lease obligations	962,165			1,102,425
Less:
Discount on debt	(2,387		)	(2,527		)
Deferred debt issuance costs	(7,063		)	(8,886		)
Current maturities of long-term debt and capital lease obligations	(23,180		)	(907		)
Long-term debt and capital lease obligations	$	929,535		$	1,090,105

Senior Notes. On July 1, 2014, we issued $250.0 million of the unsecured Senior Notes due July 2022 bearing interest at 7.25% (the "Senior Notes"), pursuant to an indenture dated July 1, 2014 (the "Indenture"), among Conn's, Inc., its subsidiary guarantors (the "Guarantors") and U.S. Bank National Association, as trustee. The effective interest rate of the Senior Notes after giving effect to the discount and issuance costs is 7.8%.

The Indenture restricts the Company's and certain of its subsidiaries' ability to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock ("restricted payments"); (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. Specifically, limitations on restricted payments are only effective if one or more of the following occurred: (1) a default were to exist under the Indenture, (2) we could not satisfy a debt incurrence test, and (3) the aggregate amount of restricted payments were to exceed an amount tied to consolidated net income. These limitations, however, are subject to two exceptions: (1) an exception that permits the payment of up to $375.0 million in restricted payments, and (2) an exception that permits restricted payments regardless of dollar amount so long as, after giving pro forma effect to the dividends and other restricted payments, we would have had a leverage ratio, as defined under the Indenture, of less than or equal to 2.50 to 1.0. As a result of these exceptions, as of April 30, 2018, $183.5 million would have been free from the distribution restriction. However, as a result of the revolving credit facility distribution restrictions, which are further described below, we were restricted from making a distribution in respect of the Senior Notes in excess of $64.7 million as of April 30, 2018. During any time when the Senior Notes are rated investment grade by either of Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended and we will cease to be subject to such covenants during such period. Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we fail to make payment of other indebtedness prior to the expiration of any applicable grace period or upon acceleration of indebtedness prior to its stated maturity date in an amount exceeding $25.0 million, as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.

Asset-backed Notes. During fiscal years 2018 and 2017 we securitized customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issued asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.

Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.

The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act of 1933, as amended. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events.

The asset-backed notes consist of the following:



Asset-Backed Notes	Original Principal Amount		Original Net Proceeds⁽¹⁾		Current Principal Amount		Issuance Date	Maturity Date	Fixed Interest Rate	Effective Interest Rate⁽²⁾
2017-A Class A Notes	$	313,220	$	304,451	$	4,171	4/19/2017	7/15/2019	2.73%	5.33%
2017-A Class B Notes	106,270		103,300		106,270		4/19/2017	2/15/2020	5.11%	5.73%
2017-A Class C Notes	50,340		48,919		50,340		4/19/2017	10/15/2021	7.40%	7.77%
2017-B Class A Notes	361,400		358,945		188,997		12/20/2017	7/15/2020	2.73%	4.95%
2017-B Class B Notes	132,180		131,281		132,180		12/20/2017	4/15/2021	4.52%	5.14%
2017-B Class C Notes	78,640		77,843		78,640		12/20/2017	11/15/2022	5.95%	6.29%
Warehouse Notes	52,226		50,774		22,321		2/15/2018	2/15/2019	Index + 2.75% ⁽³⁾	7.72%
Total	$	1,094,276	$	1,075,513	$	582,919


(1)	After giving effect to debt issuance costs and restricted cash held by the VIEs.


(2)	For the three months ended April 30, 2018, and inclusive of retrospective adjustments to deferred debt issuance costs based on changes in timing of actual and expected cash flows.


(3)	The rate on the Warehouse Notes is defined as the applicable index plus a 2.75% fixed margin.

On February 15, 2018, affiliates of the Company closed on a $52.2 million financing under a receivables warehouse financing transaction entered into on February 6, 2018 (the "Warehouse Notes"). The net proceeds of the Warehouse Notes were used to prepay in full the Series 2016-B Class B Notes (the "2016-B Redeemed Notes") that were still outstanding as of February 15, 2018.

On February 15, 2018, the Company completed the redemption of the 2016-B Redeemed Notes at an aggregate redemption price of $73.6 million (which was equal to the entire outstanding principal of, plus accrued interest and the call premiums on, the 2016-B Redeemed Notes). The net funds used to call the notes was $50.3 million, which is equal to the redemption price less adjustments of $23.3 million for funds held in reserve and collection accounts in accordance with the terms of the applicable indenture governing the 2016-B Redeemed Notes. The difference between the net proceeds of the Warehouse Notes and the carrying value of the 2016-B Redeemed Notes at redemption was used to fund fees, expenses and a reserve account related to the Warehouse facility. In connection with the early redemption of the 2016-B Redeemed Notes, we wrote-off $0.4 million of debt issuance costs.

Revolving Credit Facility. On March 31, 2017, Conn's, Inc. and certain of its subsidiaries (the "Borrowers") entered into a Third Amendment to the Third Amended and Restated Loan and Security Agreement, dated as of October 30, 2015, with certain lenders, which, as of April 30, 2018, provided for a $750.0 million asset-based revolving credit facility (the "revolving credit facility") under which credit availability is subject to a borrowing base. As of April 30, 2018, the revolving credit facility matured on October 30, 2019.

As of April 30, 2018, loans under the revolving credit facility bore interest, at our option, at a rate equal to LIBOR plus the applicable margin based on facility availability which specified a margin ranging from 2.75% to 3.25% per annum (depending on quarterly average net availability under the borrowing base) or the alternate base rate plus a margin ranging from 1.75% to 2.25% per annum (depending on quarterly average net availability under the borrowing base). The alternate base rate is the greatest of the prime rate announced by Bank of America, N.A., the federal funds rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. As of April 30, 2018, we also paid an unused fee on the portion of the commitments that was available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.75% per annum, depending on the average outstanding balance and letters of credit of the revolving credit facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the revolving credit facility was 7.4% for the three months ended April 30, 2018.

The revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory, and provides for a $40.0 million sub-facility for letters of credit to support obligations incurred in the ordinary course of business. The obligations under the revolving credit facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As of April 30, 2018, we had immediately available borrowing capacity of $233.5 million under our revolving credit facility, net of standby letters of credit issued of $2.8 million. We also had $366.2 million that may become available under our revolving credit facility if we grow the balance of eligible customer receivables and total eligible inventory balances.

The revolving credit facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The revolving credit facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may make dividends and distributions to the Company and other obligors under the revolving credit facility without restriction. As of April 30, 2018, we were restricted from making distributions, including repayments of the Senior Notes or other distributions, in excess of $64.7 million as a result of the revolving credit facility distribution restrictions. The revolving credit facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the revolving credit facility.

Debt Covenants. We were in compliance with our debt covenants, as amended, at April 30, 2018. A summary of the significant financial covenants that govern our revolving credit facility, as amended, compared to our actual compliance status at April 30, 2018 is presented below:



	Actual	Required Minimum/ Maximum
Interest Coverage Ratio must equal or exceed minimum	2.86:1.00	1.25:1.00
Leverage Ratio must not exceed maximum	2.14:1.00	4.00:1.00
ABS Excluded Leverage Ratio must not exceed maximum	1.20:1.00	2.00:1.00
Cash Recovery Percent must exceed stated amount	5.51%	4.45%
Capital Expenditures, net, must not exceed maximum	$11.5 million	$75.0 million

All capitalized terms in the above table are defined by the revolving credit facility, as amended, and may or may not agree directly to the financial statement captions in this document. The covenants are calculated quarterly, except for the Cash Recovery Percent, which is calculated monthly on a trailing three-month basis, and capital expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter.