CASE STUDY
Navigating Risk
Industry
— Retail
— Consumer Finance
Duration
— 2 Weeks
Team
— 1 Vice President
— 1 Managing Director
Services
— FDD
— Capital structure & liquidity analysis
— Quarterly CF
Navigating Risk in Retailer
A private credit fund firm needed to assess the high-yield bonds of a $3.3 billion revenue, $300 million EBITDA retailer in the U.S. amid financial and operational challenges. The Company, serving underbanked and lower-income households, faced regulatory scrutiny, execution risks from distribution changes, a failed product launch, and potential covenant violations. Our task was to evaluate the sustainability of its capital structure, assess liquidity, and determine if the bonds presented a compelling investment opportunity.
The Execution
We conducted an in-depth financial and operational due diligence, including:
Regulatory Risk Assessment: Evaluated state regulations governing rental purchase transactions, disclosure requirements, grace periods, collection and fee restrictions, and federal-level risks, including potential adverse CFPB legislation and Congressional actions.
Charge-Off Rate Analysis: Reviewed recent increases in charge-offs down to the most granular level, identifying contributing factors such as customer credit trends and macroeconomic conditions.
Customer Creditworthiness: Assessed subprime customer repayment ability across different economic cycles, factoring in potential wage inflation and employment shifts.
Cost-Saving Initiatives: Validated the feasibility of proposed measures such as store closures, workforce reductions, inventory liquidations, and associated cash costs.
Operational Execution Risks: Analyzed the impact of a failed product launch that increased theft rates and negatively affected charge-offs.
Covenant Compliance: Conducted stress testing on EBITDA deterioration to quantify the risk of lease-adjusted leverage covenant violations.
Dividend Sustainability: Examined restricted payment covenants to determine whether the Company could sustain common dividend payments.
Liquidity Assessment: Reviewed inventory and receivables to assess borrowing base sufficiency and overall liquidity under the revolving credit facility.
The Results
Despite industry headwinds, execution risks, and a subprime customer base, our assessment concluded that the Company’s high-yield securities were “money good.” Key strengths included a strong national footprint, recognized brand, diverse merchandise, resilient customer demand, limited regulatory risk, and tight debt covenants. Approximately three years later, the bonds were redeemed at par, generating an annualized return of ~12%, outperforming the broad high-yield market.
