CURO 5 February 2024 8K

Notes:

1. SPV balances are Debtwire estimates based on prior disclosure. Debtwire reached out to the company for more details and has yet to receive a response as of the time this report was published.
2. Unrestricted cash as of 31 December 2023 was USD 85m. Debtwire’s USD 75m estimate is based on the 5 February 2024 8K disclosure. Debtwire reached out to the company for more details and has yet to receive a response as of the time this report was published.
3. CURO’s total debt as of 31 December 2023 was USD 2.056b based on the balance sheet information disclosed in the 5 February 2024 8K. Debtwire reached out to the company for more details and has yet to receive a response as of the time this report was published.

Recent Events

On 5 February 2024, CURO issued a robust 8K, linked above. In the filing the company disclosed:

1. Preliminary financial results for 4Q23, highlighted below.
2. A potential covenant breach relating to its 18% Term Loan. The company believes it has not met minimum required liquidity levels as of 31 January 2024, and has subsequently received a waiver from the lenders thru 1 March 2024.
3. On 1 February 2024, the company elected to not make interest payments on its 1.5lien and 2lien facilities. It has entered into a consent solicitation for the 1.5lien to extend the grace period from seven days to thirty days, to then match the thirty-day period for the 2lien facility. The consent solicitation period is set to expire on 7 February 2024.
4. Defaults similar to the default under the 18% Term Loan have occurred under the company’s securitization facilities. Debtwire reached out to the company for more details and has yet to receive a response as of the time this report was published.
5. CURO is working with advisors to engage in discussions with lenders and other key stakeholders on what it describes as a “potential comprehensive financial restructuring”. As of the release of the 8K, no agreements had been reached relating to any financial restructuring. Debtwire reached out to the company for more details and has yet to receive a response as of the time this report was published.
6. The company will no longer host an earnings call on 7 February 2024 due to the above. The timing for this call was released on 22 January 2024, which suggests to us that something very unexpected occurred in late January to trigger this potential covenant breach.

As of the time this report was published, CUROs equity was down ~53% from 2 February 2024 close, and credit is mixed with the 18% Term Loan flat, 1.5lien paper down ~13%, and 2lien paper down ~15%.

Financials

CURO reported revenue of USD 168m for 4Q23, versus USD 182m for 4Q22, a decrease of 8% YoY. Consistent with prior period comments, management noted the YoY decline was due to a strategic shift towards a higher mix of longer-term, lower yield and lower risk products. Topline results were generally in line with our estimates.

Operating margin for 4Q23 was 11%, versus negative 4% in 4Q22. Current provisions were 34% of revenue for 4Q23, below the 43% of revenue level in the prior-year period. Salaries and benefits decreased to 29% of revenue in 4Q23 from 33% in 4Q22. Occupancy as a per cent of revenue was 7% for 4Q23 versus 6% for 4Q22. Higher other operating expenses in the prior period make up the remainder of the year-over-year comparison.

The company did not report Adj. EBITDA as part of the release. Based on Debtwire’s early estimates, we believe the company generated Adj. EBITDA in the realm of USD 35m for 4Q23 versus USD 28m for 4Q22. We will update these results if/when the company releases more detailed financials. Debtwire reached out to the company for more details and has yet to receive a response as of the time this report was published.

Debtwire’s preliminary updated NTM estimates assume loan growth consistent with recent trends and annualized gross yield on the book in line with 4Q23.

Notes:

1. Total Liquidity for 1Q23 as of 9 May 2023, 4Q23 and FY23/LTM as of 5 February 2024 estimate.

Based on our preliminary review of 4Q23 financials and credit performance, it does not appear that CURO experienced anything in terms of unexpected performance or credit deterioration in the period that would explain the covenant breaches. We are left speculating that a timing mismatch between payment receipts and advances in January 2024 took liquidity below required levels and then triggered the potential breach noted in the 8K. It is also possible that the cash flow cycle for longer term, lower yield and lower risk products, which are the primary focus for new business, differ from the prior focus, leaving the prior covenant level out of reach for CURO. It would be odd then for CURO to not have sought to revise covenants with its various lenders, but perhaps that was not available until the actual breach potentially occurred. We imagine the 1.5lien holders will agree to extend the grace period to thirty days to avoid a potential free-fall bankruptcy later this week. We also believe parties involved in the company’s SPVs, most notably Atalaya, will also not force a near-term filing and instead will support a more organized process, as much as that is possible within a thirty-day timeframe.  Debtwire reached out to the company for more details around the SPV cure processes and has yet to receive a response as of the time this report was published.

CURO made a good strategic decision to punt the Flexiti business late last year and was left with a nice lending business that is weighed down by a legacy balance sheet. Based on our preliminary estimates for FY2023, 4Q23 and NTM, we believe CURO’s forecasted NTM liquidity could be zero. If this estimate is accurate, it stands to reason it was a driving factor in the decision to not make the recent 1.5lien and 2lien interest payments. We suspect the company will work to equitize at least the 1.5lien and 2lien paper, which based on our estimates would reduce annual interest by USD 75m and provide the company more breathing room to explore its growth aspirations for the direct lending business.

We will update our valuation for CURO if/when the company files additional disclosure and/or a full reporting package, for instance, a 10-K for FY2023. Debtwire reached out to the company for more details and has yet to receive a response as of the time this report was published.

Curo Group Holdings Corp. [NYSE:CURO] is a non-bank lender. The company offers products and services to consumers in the US and Canada.