Moody's downgrades Rent-A-Center, rates loan add-on Ba2

Moody's Investors Service said it assigned a Ba2 rating with a loss-given-default assessment of LGD3 (39%) to Rent-A-Center, Inc.'s proposed $600 million add-on to its secured term loan B.

The agency also downgraded the company's corporate family and probability-of-default ratings to Ba3 from Ba2; $400 million secured revolving credit facility to Ba2, $200 million secured term loan A and $125 million secured term loan B to Ba2 (LGD 3, 39%) from Ba1; and $300 million 7½% senior subordinated notes due 2010 to B2 (LGD 5, 88%) from Ba3.

This concludes the review that began on Aug. 8, and the outlook is stable.

Proceeds from the new debt will be used to finance the purchase of Rent-Way, Inc., including its senior subordinated notes.

The agency said the downgrade of Rent-A-Center's ratings is prompted by the increase in financial and business risk that will occur as a result of the debt-financed acquisition. However, the stable outlook anticipates that the company will steadily grow comparable store sales and cash flow, that the Rent-Way expansion will achieve a portion of the anticipated post-merger operating efficiencies and that the business line expansion into financial services will prove profitable.

The ratings are supported by the company's leading position in the consumer rent-to-own industry in terms of geography, store count, sales and store count; the lower cyclicality and seasonality of rent-to-own stores compared with many other retailing segments; and the relatively high quality of the store base.

Moody's said the ratings also reflect key credit metrics such as debt to EBITDA, interest coverage and free cash flow to debt that have Ba or B characteristics, the unproven success to date of the company's initiatives designed to stimulate average unit volume growth and the challenges in expanding the personal loan business beyond the test stage.

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