What: Shares of retailer Conn's (NASDAQ:CONN) were sent soaring on Monday after the company announced it had amended an $810 million asset-based revolving credit facility. The stock closed on Monday up about 20%.
So what: Conn's operates an in-house financing business, which is responsible for financing a large portion of the company's sales. This business model is capital intensive, especially since Conn's is growing its store count rapidly, and the company uses debt to extend credit to its customers.
In the 8-K that Conn's filed with the SEC, the details of the amended credit facility are laid out. Most notably, the maximum total leverage ratio covenant, which is the ratio of total liabilities, adjusted for some items, to tangible net worth, was raised from 2.0 times to 4.0 times. This move allows Conn's to borrow more based on the same asset base. In addition, conditions around future securitizations of Conn's customer receivables portfolio were relaxed.
Now what: Why is Conn's soaring on this seemingly mundane news? This move comes after the company announced that it was securitizing $1.4 billion of the consumer debt on its balance sheet. Conn's stock collapsed in 2014 as the delinquency rate for its in-house financing business surged, and while the company has tightened its lending standards, the delinquency rate remains elevated.
While the amended credit facility seems like positive news for Conn's, the market's reaction appears to be vastly overdone. The surge in the stock price today could have more to do with the fact that the stock had been more than cut in half since the beginning of July rather than the actual details of the credit facility announcement.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.