Varsity Brands Holding Co. and its Hercules Achievement subsidiary are jointly offering $100 million of senior secured notes due 2024. The proceeds will be used to pay down borrowings on its revolving credit facility.
Varsity Brands is the parent of BSN Sports, Varsity Spirit and Herff Jones.
News of the offering came from a press release from Moody’s Investors Service which assigned a B2 rating to the offering. At the same time, Moody’s affirmed Varsity Brands ratings, including its Corporate Family Rating (CFR) at B3, its Probability of Default Rating (PDR) at B3-PD and the rating on the senior secured first-lien term loan due 2024 at B2. The outlook remains negative.
In the release, Moody’s affirmed the ratings because the notes offering improves Varsity Brands liquidity by increasing revolver availability which provides greater financial flexibility to fund business operations over the next 12 months including the negative effects from COVID-19. Moody’s assumes that U.S. schools will reopen in the fall.
Moody’s said it is nevertheless maintaining the negative outlook because there is uncertainty about the extent to which sports and extracurricular activities will resume and at what level. The early school closures and event cancellations across the U.S. in response to the coronavirus, the significant rise in unemployment and lower consumer confidence will continue to negatively impact demand for the Company’s products, at least through the current outbreak, according to the rating agency. Given the anticipated decline in earnings, Moody’s expects debt/EBITDA financial leverage to increase above 8.0x over the next 6-to-12 months and for free cash flow generation to weaken in fiscal 2020. In addition, there is uncertainty around the duration of the outbreak and the pace of re-openings once the pandemic subsides. A return of school and extracurricular activities to a normal level will likely take more than a year but would provide the Company an ability to reduce leverage and debt to cover the cash burn experienced during school closures.
