Rent-A-Center's new $650 million credit is not rated one notch above its senior implied rating of Ba2 because of its modest tangible asset coverage. Although the deal is adequately secured, the coverage is low compared to the rent-to-own store chain's total and secured debt, explained Marie Menendez, v.p. and senior credit officer at Moody's Investors Service. Moody's notes the company's secured debt levels continue to increase as a proportion of total debt, which eliminates the benefit from growth in tangible assets or enterprise value. Out of the company's $1.7 billion in assets, about $800 million is in goodwill, explained Robert Davis, Rent-A-Center's v.p. of finance, cfo and treasurer. He noted that the company viewed the ratings as positive. The deal is rated Ba2 and includes a five-year, $120 million revolver, a six-year, $450 million term loan and an $80 million synthetic term loan.
Rent-A-Center has a history of volatility due to shifting strategies, Moody's states. Davis said the company faced problems in the fall of 2001, which led to a revamped management team, but he disagreed that there was a history of volatility. There is also a continued risk from the low credit profile of the company's customer base. Menendez added that the media's negative image of the company's practice--to rent items with added interest rates--also works against the company's business. "[Rent-A-Center's] definitely filling a market need," she pointed out, explaining that the company is catering to a specific audience. Davis disagreed with the negative media image factor. "This transaction in the industry has become more widely accepted," he said.
The rating reflects, to Rent-A-Center's credit, the company's modest leverage and its continuation of organic and acquisitive store growth. The company recently acquired 295 stores from Rent-Way and its lease-adjusted debt-to-EBITDAR improved in the last year. Davis said current debt-to-EBITDA multiples are at 1.2 times, while levels are expected to reach 1.7 times after recapitalization efforts are completed. The company's current management team has also demonstrated improvement over the last two years and favorable rent-to-own legislation has further helped the company. Added liquidity from cash balances and availability under an undrawn revolver also reflect positively in the rating.