Moody’s Investors Service downgraded the debt ratings of VF Corp. due to the company’s currently high leverage resulting from underperformance in its largest and most profitable brand, Vans, as well as large customer inventory destocking at Dickies, a slower-than-expected recovery in China, and elevated inventory levels that are leading to higher promotional sales activity and reduced margins.
Moody’s noted that VF has a debt/EBITDA of 4.2x for the twelve months ended December 31, 2022.
The rating agency also said borrowed incremental debt through an unrated delayed draw term loan to pay $875.7 million of gross tax and interest being disputed in connection with its appeal of an adverse legal ruling related to VF’s acquisition of Timberland in 2011.
Moody’s said, “VF is taking significant action to bring its leverage back in line with its 2.5x debt/EBITDA target through improved profitability and debt reduction, including a 41 percent dividend cut to more closely align with its 50 percent dividend payout target, a review of strategic alternatives for its Global Packs business, a number of potential asset sales in the second half of fiscal 2023, reducing working capital and aligning inventories to optimal levels, and increased efforts to reduce costs. However, in light of a difficult global economic environment, Moody’s expects leverage to remain above 2.75x over the next two fiscal years.”
VF’s debt ratings lowered included its senior unsecured debt rating to Baa2 from Baa1, senior unsecured shelf and senior unsecured MTN ratings to (P)Baa2 from (P)Baa1, subordinate shelf rating to (P)Baa3 from (P)Baa2, and preferred shelf rating to (P)Ba1 from (P)Baa3. The company’s P-2 short-term commercial paper rating was affirmed. The rating outlook changed to stable from negative.
Moody’s said in its analysis, “VF’s Baa2 senior unsecured rating is supported by its significant scale as one of the world’s largest apparel, footwear and accessory companies, with broad industry diversification by product and distribution channel. VF owns several well-known brands with strong market positions in their segments such as Vans, The North Face, Timberland, Dickies, and Supreme, with a successful long-term track record of driving sustainable organic revenue growth across its portfolio. VF’s credit profile also reflects governance considerations, particularly its willingness to pursue growth through acquisition and tolerance for higher debt and leverage, as evidenced by the December 2020 acquisition of Supreme during the pandemic. At the same time, it also reflects VF’s recent dividend cut of its historically high dividend payout and long-term track record of suspending share repurchases and reducing acquisition debt and leverage. While debt/EBITDA is currently elevated at 4.2x, VF is taking actions to bring leverage more in line with its 2.5x leverage target. However, given the underperformance at Vans and the difficult economic environment, leverage is set to remain above this target for the next two years.
“VF’s Prime-2 commercial paper rating reflects Moody’s expectation that the company will maintain good liquidity to fund cash flow needs over the next twelve months, including highly seasonal working capital needs, capital expenditures and its reduced dividend. Moody’s expects the company to successfully refinance the €850 million notes due September 20, 2023, well ahead of maturity. As of December 31, 2022, VF had $571 million of balance sheet cash and ample excess availability under its unrated $2.25 billion unsecured revolving credit facility due 2026. The credit facility supports its $2.25 billion commercial paper program, which had around $890 million outstanding as of December 31, 2022. The company also obtained an amendment to its revolver and delayed draw term loan that will improve the cushion under its consolidated net debt to net capitalization financial covenant.
“The stable outlook reflects Moody’s expectation that VF will steadily improve operating performance, cash flow and credit metrics over the next two years, led by improved performance in Vans and successful inventory reduction efforts. The outlook also reflects Moody’s expectation that VF will maintain a more conservative financial policy through a focus on debt reduction, while maintaining good liquidity, including improved free cash flow and the refinancing of its euro notes due September 2023 well ahead of maturity.”
