Debt and Financing Lease Obligations

6 Months Ended

Jul. 31, 2020

Debt and financing lease obligations consisted of the following:


(in thousands)	July 31, 2020		January 31, 2020
Revolving Credit Facility	$	63,900	$	29,100
Senior Notes	227,000		227,000
2017-B VIE Asset-backed Class C Notes	16,168		59,655
2018-A VIE Asset-backed Class A Notes	12,203		34,112
2018-A VIE Asset-backed Class B Notes	7,359		20,572
2018-A VIE Asset-backed Class C Notes	7,359		20,572
2019-A VIE Asset-backed Class A Notes	36,151		76,241
2019-A VIE Asset-backed Class B Notes	46,427		64,750
2019-A VIE Asset-backed Class C Notes	44,821		62,510
2019-B VIE Asset-backed Class A Notes	118,509		265,810
2019-B VIE Asset-backed Class B Notes	85,540		85,540
2019-B VIE Asset-backed Class C Notes	83,270		83,270
Financing lease obligations	5,855		5,209
Total debt and financing lease obligations	754,562		1,034,341
Less:
Discount on debt	(1,123)		(1,404)
Deferred debt issuance costs	(3,779)		(6,797)
Current maturities of long-term debt and financing lease obligations	(758)		(605)
Long-term debt and financing lease obligations	$	748,902	$	1,025,535

Senior Notes. On July 1, 2014, we issued $250.0 million of unsecured Senior Notes due July 2022 bearing interest at 7.25% (the “Senior Notes”), pursuant to an indenture dated July 1, 2014 (as amended, the “Indenture”), among Conn’s, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National Association, as trustee. The effective interest rate of the Senior Notes after giving effect to the discount and issuance costs is 7.8%.

The Indenture restricts the Company’s and certain of its subsidiaries’ ability to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock (“restricted payments”); (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. During any time when the Senior Notes are rated investment grade by either of Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended and we will cease to be subject to such covenants during such period. As of July 31, 2020, $172.3 million would have been free from the restricted payments covenant contained in the Indenture. Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we fail to make payment of other indebtedness prior to the expiration of any applicable grace period or upon acceleration of indebtedness prior to its stated maturity date in an amount exceeding $25.0 million, as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.

Asset-backed Notes. From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issue asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.

Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes, if any, and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries related to credit insurance and RSAs on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.

The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act of 1933. If an event of default were to occur under the indenture that governs

the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events.

The asset-backed notes outstanding as of July 31, 2020 consisted of the following:


(dollars in thousands)
Asset-Backed Notes	Original Principal Amount		Original Net Proceeds ⁽¹⁾		Current Principal Amount		Issuance Date	Maturity Date	Contractual Interest Rate	Effective Interest Rate ⁽²⁾
2017-B Class C Notes	$	78,640	$	77,843	$	16,168	12/20/2017	11/15/2022	5.95%	6.21%
2018-A Class A Notes	219,200		217,832		12,203		8/15/2018	1/17/2023	3.25%	4.80%
2018-A Class B Notes	69,550		69,020		7,359		8/15/2018	1/17/2023	4.65%	5.55%
2018-A Class C Notes	69,550		68,850		7,359		8/15/2018	1/17/2023	6.02%	6.93%
2019-A Class A Notes	254,530		253,026		36,151		4/24/2019	10/16/2023	3.40%	4.25%
2019-A Class B Notes	64,750		64,276		46,427		4/24/2019	10/16/2023	4.36%	4.77%
2019-A Class C Notes	62,510		61,898		44,821		4/24/2019	10/16/2023	5.29%	5.71%
2019-B Class A Notes	317,150		315,417		118,509		11/26/2019	6/17/2024	2.66%	4.27%
2019-B Class B Notes	85,540		84,916		85,540		11/26/2019	6/17/2024	3.62%	4.17%
2019-B Class C Notes	83,270		82,456		83,270		11/26/2019	6/17/2024	4.60%	4.94%
Total	$	1,304,690	$	1,295,534	$	457,807

(1)After giving effect to debt issuance costs.

(2)For the six months ended July 31, 2020, and inclusive of the impact of changes in timing of actual and expected cash flows.

Revolving Credit Facility. On May 23, 2018, Conn’s, Inc. and certain of its subsidiaries (the “Borrowers”) entered into the Fourth Amended and Restated Loan and Security Agreement (as amended from time to time, “Fourth A&R Loan and Security Agreement”), with certain lenders, which provides for a $650.0 million asset-based revolving credit facility (the “Revolving Credit Facility”) under which credit availability is subject to a borrowing base and a maturity date of May 23, 2022.

The Revolving Credit Facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory and provides for a $40.0 million sub-facility for letters of credit to support obligations incurred in the ordinary course of business. The obligations under the Revolving Credit Facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As of July 31, 2020, we had immediately available borrowing capacity of $409.7 million under our Revolving Credit Facility, net of standby letters of credit issued of $12.5 million and prior to giving effect to a minimum liquidity requirement of $125.0 million pursuant to the Third Amendment as defined below. We also had $163.9 million that could have become available under our Revolving Credit Facility were we to grow the balance of eligible customer receivables and total eligible inventory balances.

On June 5, 2020 we entered into the Third Amendment to our Revolving Credit Facility (the “Third Amendment”). Under the Third Amendment, loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 3.00% to 3.75% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 2.00% to 2.75% per annum (depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the federal funds effective rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. We also pay an unused fee on the portion of the commitments that is available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.50% per annum, depending on the average outstanding balance and letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the Revolving Credit Facility was 4.8% for the six months ended July 31, 2020.

The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make distributions to the Company and other obligors under the Revolving Credit Facility without restriction. We are restricted from making distributions, including

repayments of the Senior Notes or other distributions, as a result of the Revolving Credit Facility distribution and payment restrictions. The Revolving Credit Facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit Facility.

Debt Covenants. The Third Amendment waived the interest coverage covenants beginning with the first quarter of fiscal year 2021 and continuing until the date on which the Company delivers financial statements and a compliance certificate for the fourth quarter of fiscal year 2021. After giving effect to the foregoing amendment, as of July 31, 2020, we were in compliance with the covenants in our Revolving Credit Facility. If we were to breach certain covenants under our Revolving Credit Facility in the future, that breach might trigger a default under our Revolving Credit Facility, which, if not remedied, would require a waiver from the lenders under our Revolving Credit Facility or an amendment to our Revolving Credit Facility in order for us to avoid an event of default. There can be no assurances that, in the event of such a covenant breach, we would be able to obtain the necessary waivers or amendments to remain in compliance with the covenants in our Revolving Credit Facility.

A summary of the significant financial covenants that govern our Revolving Credit Facility, as amended, compared to our actual compliance status at July 31, 2020 is presented below:


	Actual	Required Minimum/ Maximum
Interest Coverage Ratio for the quarter must equal or exceed minimum	Not Tested	1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed minimum	Not Tested	1.50:1.00
Leverage Ratio must not exceed maximum	1.95:1.00	4.50:1.00
ABS Excluded Leverage Ratio must not exceed maximum	1.18:1.00	2.50:1.00
Capital Expenditures, net, must not exceed maximum	$34.0 million	$100.0 million

All capitalized terms in the above table are defined in the Revolving Credit Facility and may or may not match directly to the financial statement captions in this document. The covenants are calculated quarterly, except for capital expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter.