Moody’s Investors Service changed Outerstuff LLC’s outlook to negative from positive. Concurrently, Moody’s affirmed the company’s Caa2 corporate family rating (CFR), Caa2-PD probability of default rating (PDR) and Caa3 senior secured term loan rating.
Outerstuff, based in New York City, is a manufacturer of licensed children’s sports apparel for sports leagues and colleges.
The change in outlook to negative reflects the company’s approaching 2023 debt maturities and growing risk that supply chain challenges and inflationary pressures could result in a weaker than previously expected recovery in 2022. The negative outlook also reflects Moody’s view that liquidity will weaken in the first half of 2022.
The affirmation of the Caa2 CFR reflects the company’s high leverage of 20x Moody’s-adjusted debt/EBITDA as of December 31, 2021, and near-term maturities, which result in a heightened probability of default. The affirmation also incorporates the positive momentum of the business, driven by growing demand for kid’s licensed sports apparel and strong bookings, although the level of recovery is subject to industry-wide risks.
Moody’s said in its analysis, “Outerstuff’s Caa2 CFR reflects the company’s high risk of default given its very high leverage and weak liquidity including the December 2023 debt maturities. While revenues exceeded pre-pandemic levels in the second half of 2021, Outerstuff’s earnings and credit metrics remain very weak, with Moody’s-adjusted debt/EBITDA of 20x as of December 31, 2021 (equivalent to 14x debt/credit agreement EBITDA). Outerstuff reported strong early 2022 bookings and upside from new licenses; however, there is uncertainty regarding the level of earnings growth given supply chain disruptions and high input costs. Further, the company has a history of underperformance relative to budget in 2015/19 and 2021, as well as earnings declines in 2016/19. The credit profile also reflects the company’s small revenue scale, narrow product concentration primarily in licensed children’s sports apparel and reliance on licensing arrangements from several sports leagues for a significant majority of revenue. Moody’s expects overall liquidity to be weak reflecting the upcoming maturities and expectations for limited revolver availability and tight covenant cushion, partly balanced by positive annual free cash flow. However, Outerstuff’s cash flow is highly seasonal and typically generated during the third quarter.
“The credit profile is supported by the potential for significant earnings recovery driven by strong retailer demand for children’s sports apparel as sports events resume. Moody’s expects leverage to be in the high-6x range Moody’s-adjusted debt/EBITDA at year-end 2022 and EBITA/interest expense in the high 1x range. In addition, the credit profile benefits from Outerstuff’s diversification across retail channels, and entrenched market position related to exclusive license contracts with the NFL, NBA, NHL, MLB, NCAA, MLS, and USA Olympics, which allow it to sell virtually all children’s apparel with the teams’ logos. In addition, the children’s licensed sports apparel market is relatively stable because of its low fashion risk, natural replenishment cycle and consumers’ steady interest in team sports.”
Photo courtesy Outerstuff
