Moody’s Investors Service downgraded the debt ratings of Vista Outdoor Inc. following the company’s “continued weak operating performance and relentless social pressure regarding possible future gun regulations.”

The following ratings for Vista Outdoor were affected: Corporate Family Rating (CFR) to B2 from B1, Probability of Default Rating to B2-PD from B1-PD, and senior unsecured rating to Caa1 from B3. The Speculative Grade Liquidity Rating is maintained at SGL-2. The rating outlook is negative.

The company’s revenue, earnings and cash flows are weak due in part to continued demand weakness in the gun industry and disruptions caused by several bankruptcies in the sporting goods retail industry. In response to these burdens, the company initiated a corporate restructuring program as it attempts to reduce costs, improve earnings and reduce leverage. Moody’s expects debt/EBITDA to approach 5.5 times in the next 12 months from over 6.0 times pro forma through a combination of earnings growth and debt repayment with free cash flow. Moody’s believes social risk will remain high for Vista due to its participation in the gun ammunition industry, although the risk has somewhat decreased with the recent sale of its gun company, Savage Arms.

The negative outlook reflects the uncertainty around the timing of when the company’s operating performance will improve and the ambiguity over when ammunition demand trends will stabilize.

Ratings downgraded:

  • Corporate Family Rating to B2 from B1;
  • Probability of Default Rating to B2-PD from B1-PD;
  • Senior unsecured notes to Caa1 (LGD 5) from B3 (LGD 5)

Rating maintained:

  • Speculative Grade Liquidity Rating at SGL-2

The outlook on all ratings is negative

Ratings Rationale

Vista’s ratings reflect its high pro forma financial leverage with debt/EBITDA at around 6.0 times, weak operating performance, and the uncertainty surrounding the gun industry. Moody’s expects Vista’s debt/EBITDA to approach 5.5 times in the next six to 12 months through earnings growth and debt repayments with free cash flow. Vista’s credit metrics need to be stronger than other similarly-rated consumer durable companies. The ratings also reflect Vista’s strong competitive position with leading brands in several niche categories and favorable demand trends in the U.S. for outdoor activities.

Ratings could be downgraded if Vista’s operating performance does not stabilize or if there is an increase in adverse gun industry regulations. Ratings could also be downgraded if debt/EBITDA is sustained above 5 times.

More clarity around gun industry regulation and long-term ammunition demand trends is needed for Moody’s to consider an upgrade. Moody’s would also need more certainty about the company’s long term business strategy, its ultimate portfolio of brands, and long-term risk profile before it would consider an upgrade. Additionally, debt/EBITDA would need to be sustained around 4 times before any possible upgrade.

Vista Outdoor, based in Anoka, Minnesota, is a manufacturer and marketer of ammunition and outdoor sports and recreation products. The company produces a broad product line for the biking, winter sports, hunting, shooting sports, wildlife watching, archery, and golf markets. Major brands include Bushnell, BLACKHAWK!, CamelBak, Federal, and Camp Chef. Revenue is approximately $1.8 billion.