The debt ratings of Compass Group Diversified Holdings LLC, owner of 5.11 Tactical, BOA, and Primaloft businesses in the active lifestyle space, were lowered by Moody’s. The ratings agency said the downgrade reflects CODI’s “elevated financial leverage based on the restated financials, the uncertainty around the company’s ability to reduce leverage and generate sustained and comfortably positive free cash flow over the next 12 months.
Moody’s also noted that the company’s liquidity is constrained by the approaching maturity of its credit facility in July 2027, sizable term loan amortization payments in 2026, and stepdown of financial maintenance covenant thresholds.
CODI’s businesses also include Velocity Outdoor, The Honey Pot Co., Altor Solutions, Arnold Magnetics, and Sterno.
Debt ratings lowered include CODI’s Corporate Family Rating (CFR) to B3 from B2, Probability of Default Rating to B3-PD from B2-PD, and the rating on the senior unsecured notes to Caa1 from B3. The rating outlook is negative. Previously, the ratings were under review for downgrade. Moody’s upgraded the company’s speculative grade liquidity (SGL) rating to SGL-3 from SGL-4.
The rating action concludes the downgrade review originally initiated on May 12, 2025, following CODI’s disclosure of financing, accounting, and inventory irregularities at its subsidiary, Lugano Holdings Inc. (Lugano). Because of these irregularities and the ongoing investigation at Lugano, CODI also disclosed non-reliance of its financial statements and delayed the filing of its quarterly Form 10-Q in fiscal 2025.
Lugano filed for Chapter 11 bankruptcy protection on November 16, 2025. On December 19, 2025, CODI completed an amendment to its senior secured credit facility that waived events of default related to breaches of financial and other covenants. In addition, the company is now current on its financial reporting. CODI filed restated financial statements for fiscal years 2022, 2023, and 2024 on December 8, 2025, and subsequently filed Form 10-Q for 2025. The company filed the 10Q for the third quarter ended September 2025 on January 14, 2026.
Moody’s estimates CODI’s debt/EBITDA leverage (ratios are Moody’s-adjusted unless otherwise stated) is high at around 8.3x (excluding Lugano’s negative EBITDA and $37 million of expenses related to the Lugano investigation) as of the last 12-month period (LTM) ending 3Q-2025. CODI’s debt balance increased as it funded large investments in now-bankrupt Lugano.
CODI anticipates its total leverage ratio (as per the company’s definition, prior to the deduction of corporate overhead expenses) to be around 5.3x as of fiscal year-end 2025. The December 2025 credit agreement amendment provided the company with some flexibility under financial maintenance covenants. The amendment increased the maximum total leverage ratio covenant to 5.75x from 5.0x and lowered the minimum fixed charge coverage ratio covenant to 1.0x from 1.5x for the 4Q-2025 through 3Q-2026 periods. However, the financial covenants will step down to the original thresholds by 1Q-2027. The company is also required to pay milestone fees if it is unable to reduce its total leverage ratio below 4.5x or its senior secured leverage ratio below 1.0x, commencing in 2Q-2026 through 1Q-2027. The milestone fee starts at $5 million for the 2Q-2026 period and increases by $1.5 million each quarter through 1Q-2027.
CODI’s remaining eight operating subsidiaries are collectively growing in 2025, and the company is focused on reducing its financial leverage via organic EBITDA growth and debt repayment with excess cash flows. Cash flow generation will benefit from the elimination of common dividend distributions and lower management payments as CODI recovers overpayments related to Lugano. The company is also actively pursuing an asset sale to accelerate deleveraging. However, there is uncertainty around the company’s ability to improve free cash flow generation and reduce its financial leverage ahead of the covenant stepdown, amid a challenging operating environment marked by cumulative high inflation, heightened economic uncertainty, and supply chain disruptions that are pressuring discretionary spending. The company has a good track record of opportunistically divesting subsidiaries. However, the company will need to balance the speed of execution with value realization, and this could be challenged by macroeconomic uncertainty and the approaching maturities.
The upgrade to SGL-3 from SGL-4 reflects that the financial statement filings, receipt of waivers and covenant relief improve revolver access and eliminate the overhang of a potential debt acceleration and need to operate under forbearance agreements.
Moody’s said, “The company’s adequate liquidity is supported by a cash balance of $61 million and access to a mostly undrawn $100 million revolver as of the end of 3Q-2025, pro forma for the December 2025 amendment that eliminated the $60 million cap on the revolver. Liquidity is also supported by our expectations of positive free cash flow of at least $25 million over the next 12 months. These liquidity sources and the financial covenant relief provide the company with some financial flexibility over the next 12 months. However, the sizable term loan amortization payment requirement of $37.5 million in 2026, and the potential milestone fee payments constrain liquidity. Liquidity will also weaken if the company does not proactively address the approaching maturity of its senior secured credit facility due in July 2027.”
Image courtesy 5.11 Tactical
