Moody’s Investors Service downgraded Vista Outdoors, Inc.’s outlook to negative from stable, and affirmed the company’s Ba2 Corporate Family Rating (CFR) and the Ba2-PD probability of default rating.

The senior unsecured note rating was downgraded to B1 from Ba3 and the speculative grade liquidity rating was downgraded to SGL 2 from SGL 1. The outlook change is due to Vista’s weak operating performance and deteriorating credit metrics.

“A challenging retail market and weak demand for recreational firearms and accessories has led the company to increase its promotional activities and is pressuring margins,” said Kevin Cassidy, senior credit officer at Moody’s Investors Service. This has resulted in weak credit metrics with debt/EBITDA over 3 times. “However, we expect the increase in leverage to be temporary and fall below 3 times within a year or two,” noted Cassidy. The negative outlook reflects the uncertainty about the timing of when Vista’s operating performance will improve and the risk that leverage will stay elevated for an extended period.

The B1 rating on the senior unsecured notes is two notches lower than the Ba2 CFR. The downgrade to B1 reflects the increasing proportion of secured debt in the capital structure. The notes are guaranteed by the company’s domestic operating subsidiaries. The B1 rating on the notes reflects its effective subordination to the unrated secured credit facility ($640 million term loan and $400 million revolver).

The downgrade of the Speculative Grade Liquidity rating to SGL-2 from SGL-1 is principally due to diminished covenant cushion under the secured credit facility. Moody’s expects cushion of less than 15% on the debt/EBITDA covenant.

Ratings affirmed:

  • Corporate Family Rating at Ba2;
  • Probability of Default Rating at Ba2-PD;

Ratings downgraded:

  • $350 million senior unsecured notes to B1 (LGD 5) from Ba3 (LGD 5);
  • Speculative grade liquidity rating to SGL-2 from SGL-1;
  • The rating outlook is negative

Ratings Rationale

Vista Outdoors’ Ba2 Corporate Family Rating reflects its good size for its product niche with pro forma revenue around $2.6 billion, but also its high leverage with debt/EBITDA around 3 times. Ratings benefit from Vista’s strong brand recognition with brands such as Bushnell and BLACKHAWK!, an expanding base of firearm enthusiasts, and solid market share in ammunition and outdoor products. Vista’s exposure to volatile raw material prices (i.e., copper and lead) constrains the rating. The rating is also constrained by the company’s focus in ammunition and other shooting related products, and because of its recent weak operating performance and the uncertainty and headline risk surrounding the gun industry. Because of this uncertainty, Vista’s credit metrics need to be stronger than other similarly-rated consumer durable companies.

If the company’s operating performance continues to deteriorate the rating could be lowered. While unlikely in the near term, significant changes in gun regulations could also prompt a downgrade. Key credit metrics which could lead to a downgrade include debt/EBITDA remaining above 3 times for a prolonged period.

An upgrade is possible if Vista can increase revenue and restore its earnings, cash flow and credit metrics in the face of uncertainties in the gun industry. Key credit metrics that could lead to Moody’s considering an upgrade are debt/EBITDA sustained below 1.5 times.

The company’s brands include Federal Premium, CamelBak, Savage Arms, Bushnell, Primos, Blackhawk, Bollé, Bell and Giro.