Investing.com -- S&P Global Ratings has revised its outlook on World Acceptance Corp. (NASDAQ: WRLD ) to stable from negative, citing improved asset quality and a stronger cushion against covenant requirements. The 'B-' issuer credit rating and 'CCC+' issue rating on the company's senior unsecured notes were also affirmed.

World Acceptance Corp.'s asset quality saw a significant improvement in the nine months ended Dec. 31, 2024. The company's net charge-offs dropped to around 17.1% of net receivables, down from 17.4% a year prior and 23.6% in the same period in 2022. This improvement in operating performance has allowed the company to operate with a comfortable cushion against its covenant requirements.

The company's operating strategy shift towards smaller, high-yield loans led to a decrease in net charge-offs and delinquencies. As of Dec. 31, 2024, the company's large loan portfolio accounted for 48% of total loans, a slight decrease from 52% a year prior.

The company's financial covenants are based on its fixed-charge coverage ratio (FCCR), collateral performance indicator, and total debt to consolidated adjusted net worth. Following a covenant breach in the quarter ended September 2022, the company secured covenant waivers or amendments from its lenders. The company's cushion relative to the 2.0x FCCR covenant requirement improved due to stronger operating performance.

The company is expected to responsibly handle upcoming debt maturities related to its revolving credit facility and senior unsecured notes. The company faces modest refinancing risk in the second half of 2026 with $223 million of senior unsecured notes due in November 2026 and its revolving credit facility ($336 million outstanding as of Dec. 31, 2024) due in June 2026. As of Dec. 31, 2024, the company had about $16 million cash on its balance sheet and $244 million available capacity on its revolver.

World Acceptance Corp. has gradually increased its originations in recent quarters, and its leverage, measured as debt to adjusted total equity (ATE), is expected to remain between 1.5x-2.75x as its originations normalize. WRLD's debt to ATE declined slightly to 1.3x as of Dec. 31, 2024, from 1.4x a year prior, primarily due to a lower unsecured notes balance and higher equity retention from improved operating performance.

For the nine months ended Dec. 31, 2024, the company repurchased about $48 million (16% of original issued amount) in unsecured notes at an average price of about 98% of par. S&P Global Ratings treats this debt repurchase as treasury management rather than a distressed debt exchange because the debt repurchase was done at a price with minimal discount to par.

The company's senior unsecured notes issue rating remains unchanged at 'CCC+'. The rating on the notes is one notch below the issuer credit rating because priority debt remains above 30% of adjusted assets, and it is expected that the unencumbered assets-to-unsecured debt ratio will remain above 1.0x.

The stable outlook reflects S&P Global Ratings' expectation that over the next 12 months, the company will maintain stable asset quality and sufficient cushion to its covenant requirements, operating with a leverage of 1.5x-2.75x on a sustained basis. Any potential downgrade or upgrade over the next 12 months will depend on the company's ability to maintain its operating performance, address its upcoming debt maturities, and manage any potential regulatory risks.

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