Rare 8% Yield on Single-B Bond Shows Payday Loan Industry Risk

Payday lender Curo Group Holdings Corp. is offering junk-bond investors an interest rate double the average of similarly-rated peers as it looks to refinance its debt amid heightened regulatory scrutiny and a market more sensitive to ESG concerns.

Curo is marketing $700 million of seven-year secured notes through Friday. Early pricing discussions are in the 7.75% to 8% range, a steep premium to the average 4.05% yield for similarly-rated single-B debt, according to Bloomberg Barclays index data.

The high bar for Curo reflects concerns over the subprime consumer finance industry’s reputation for predatory lending, market watchers say. That’s led regulators, especially the Consumer Financial Protection Bureau, to weigh significant curbs on the industry in recent years. While those were put on hold under former President Donald Trump, there are early signs the Biden administration plans to pick up the issue once again.

Still, investors already appear comfortable with the risks. The deal launched with enough orders from existing debtholders to fully cover the bond, according to people with knowledge of the matter who asked not to be identified discussing a private transaction.

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

Representatives for Curo didn’t respond to a request seeking comment, while Jefferies Financial Group Inc., which is leading the deal, declined to comment.

Regulatory Fears

Last July, under a nominee selected by Trump, the CFPB repealed substantial portions of a 2017 rule that would have required payday lenders to determine whether borrowers can afford their loans before lending money, a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 as much as 68% of the industry’s revenue from traditional payday loans, according to the agency.

That decision cleared away most of Curo’s federal regulatory risk, though legislation at the state level can still impact its business.

But President Joe Biden’s pick for CFPB director, Rohit Chopra, is likely to pursue stricter regulation for all consumer finance companies, said Nathan Dean, an analyst at Bloomberg Intelligence.

“The CFPB will likely intensify its oversight of small-dollar lending, both in terms of new rules and regulations,” Dean said. “But at the same time, there are so few large players in this space that a lot of the time, we see the CFPB enforcement actually targets the mom and pop stores, allowing for higher market share gains at the bigger firms.”

In a February earnings call, Curo Chief Executive Officer Don Gayhardt highlighted 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 manage the business, and have decent working relationships with federal regulators,” and state regulators too, he said.

Biden’s CFPB Pick Increases Consumer-Finance Risk: Bloomberg Intelligence

Curo has in recent years diversified the types of loans it offers, which may help it avoid the impact of possible regulation. The company also expanded abroad, acquiring Canadian point-of-sale lender Flexiti Financial Inc. in March.

Through the first quarter, Curo’s Canadian business accounted for about 70% of its outstanding loan balances, but about 70% of its revenues came from the U.S. business, according to a report Tuesday from Moody’s Investors Service.

“Moody’s expects Curo’s Canadian businesses to comprise a higher proportion of revenues going forward, but higher margins in the U.S. will continue to drive outsized revenue contributions from there,” analyst Bruno Baretta wrote, rating the new notes B3, or six steps below investment grade.

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

Along with the new bond deal, Curo announced an updated second quarter outlook and the closing of 49 U.S. stores. While most of those closures reflected strategic consolidation as more customers transition online or to other ways of accessing its loans, 19 closures in Illinois were the result of “legislative changes that eliminated its product offerings,” according to a statement.

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