Moody’s downgraded the debt ratings of Moody’s following a missed payment on a shareholder loan. Moody’s said Outerstuff has communicated that the shareholder has made a decision to convert the shareholder loan to equity, which would be a positive for Outerstuff’s capital structure
The shareholder loan maturity has subsequently been extended to June 30, 2023, and the missed payment has no impact on the company’s other outstanding debt.
Outerstuff, based in New York City, is a manufacturer of licensed children’s sports apparel for sports leagues and colleges. Annual revenue is less than $450 million.
Moody’s appended a limited default (LD) designation to Outerstuff LLC’s Caa2-PD probability of default rating (PDR), thereby changing it to Caa2-PD/LD. The /LD designation reflects a limited default in Outerstuff’s capital structure with regard to the missed principal payment of the $5 million shareholder loan that was due December 31, 2022. The PDR will revert to Caa2-PD and the /LD designation will be removed in approximately three business days. The company’s other ratings remain unchanged including the Caa2 corporate family rating and the Caa3 rating on the company’s senior secured first lien term due December 2023. The outlook remains negative.
Moody’s said in its analysis, “Outerstuff’s Caa2 CFR reflects the company’s high risk of default given its high leverage and weak liquidity, including the 2023 debt maturities. While revenues and earnings recovered in 2022 and exceeded pre-pandemic levels, Outerstuff’s leverage remains high, at 6.4x Moody’s-adjusted debt/EBITDA as of December 31, 2022. In addition, Moody’s expects earnings to decline in 2023, reflecting lower demand from retailers. Further, the company has a history of underperformance relative to the budget since 2015. The credit profile also reflects the company’s small revenue scale, narrow product concentration primarily in licensed children’s sports apparel, and its 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 debt maturities and limited revolver availability in peak borrowing periods, partly balanced by positive free cash flow.
“The credit profile is supported by Outerstuff’s 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. The company benefits from its diversification across retail channels, and the relatively stable nature of demand for children’s licensed sports apparel due to its low fashion risk, natural replenishment cycle and consumers’ steady interest in team sports.
“The negative outlook reflects the company’s approaching 2023 debt maturities and high leverage.”
