Rare 8% Yield on Simple B Bond Shows Risk in Payday Loan Industry

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(Bloomberg) – Payday lender Curo Group Holdings Corp. offers investors in junk bonds an interest rate double the average of its peers with a similar rating as it seeks to refinance its debt amid heightened regulatory oversight and a market more sensitive to ESG concerns .

Curo markets until Friday 700 million dollars of guaranteed notes over seven years. According to data from the Bloomberg Barclays Index, the first price talks are in a range of 7.75% to 8%, a steep premium over the average yield of 4.05% for a B debt of the same rating. .

The high bar for Curo reflects concerns about the reputation of the subprime consumer credit industry for predatory lending, according to market watchers. This has led regulators, especially the Consumer Financial Protection Bureau, to impose significant restrictions on the industry in recent years. While these have been suspended under former President Donald Trump, there are early signs that the Biden administration is considering taking over the problem.

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Yet investors already seem comfortable with the risks. The deal was launched with enough orders from existing creditors to fully cover the obligation, according to people with knowledge of the matter who asked not to be identified to discuss a private transaction.

The proceeds will be used to refinance the company’s existing $ 690 million 8.25% secured notes maturing in 2025, allowing Curo to reduce its interest expense if the sale goes as planned. The notes last traded at around 105 cents to the dollar, according to Trace Bond pricing data. A call to the lender is scheduled for Wednesday at 10:30 a.m. New York time.

Representatives for Curo did not respond to a request for comment, while Jefferies Financial Group Inc., which runs the deal, declined to comment.

Regulatory concerns

Last July, under a candidate selected by Trump, the CFPB repealed substantial parts of a 2017 rule that would have required payday lenders to determine whether borrowers can afford their loans before lending money, a change that could have wiped out up to 68% of the industry’s revenue from traditional payday loans, according to the agency.

The move eliminated most of Curo’s federal regulatory risks, although state-level legislation could still have an impact on its business.

But President Joe Biden’s choice for CFPB chief Rohit Chopra is expected to target tighter regulation for all consumer finance companies, said Nathan Dean, analyst at Bloomberg Intelligence.

“The CFPB will likely step up its oversight of small dollar loans, both in terms of new rules and regulations,” Dean said. “But at the same time, there are so few big players in this space that most of the time we see the CFPB application actually targeting mom and pop stores, allowing for higher market share gains in the biggest companies. “

During a call for results in February, Curo chief executive Don Gayhardt stressed that the lender has invested in compliance and risk management, which should help it navigate a changing regulatory environment.

“I feel good about our ability to run the business and I have a decent working relationship with federal regulators,” and state regulators as well, he said.

Biden’s CFPB choice increases consumer funding risk: Bloomberg Intelligence

In recent years, Curo has diversified the types of loans it offers, which can help it avoid the impact of possible regulation. The company also expanded overseas by acquiring Canadian lender Flexiti Financial Inc. in March.

In the first quarter, Curo’s Canadian operations accounted for about 70% of its outstanding loan balances, but about 70% of its revenue came from US operations, according to a report released Tuesday by Moody’s Investors Service.

“Moody’s expects Curo’s Canadian operations to represent a higher proportion of revenue going forward, but higher margins in the US will continue to generate disproportionate revenue contributions from there,” wrote analyst Bruno Baretta, noting the new B3 ratings, six levels below the investment category.

The bonds are rated B- by S&P Global Ratings.

Along with the new bond deal, Curo announced an update to the second quarter outlook and the closure of 49 stores in the United States. While most of these closures reflect strategic consolidation as more customers move online or to other means of accessing loans, 19 closures in Illinois were the result of “legislative changes that resulted in eliminated its product offerings, “according to a statement.

© 2021 Bloomberg LP

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