Moody’s Investors Service downgraded Vista Outdoor Inc. corporate family rating (CFR) to Ba3 from Ba2.

The Probability of Default Rating was downgraded to Ba3-PD from Ba2-PD and the Senior Unsecured Note rating was downgraded to B2 from B1. The SGL-2 Speculative Grade Liquidity Rating is affirmed. The CFR downgrade reflects Vista’s weak operating performance and deteriorating credit metrics and Moody’s view that they will remain weak for an extended period. The rating outlook remains negative.

“A challenging retail market and weak demand for recreational firearms and accessories is pressuring revenue and margins,” said Kevin Cassidy, senior credit officer at Moody’s Investors Service. This has resulted in weak credit metrics with debt/EBITDA currently around 4 times.

“However, we expect leverage to further increase and peak at about 4.5 times in March 2018 as revenue and earnings continue to decline,” noted Cassidy. Leverage should then start to decrease and approach 4 times by December 2018 as revenue and earnings start to improve. The negative look reflects the uncertainty over when gun and ammunition demand trends will stabilize and when Vista’s operating performance will improve.

The B2 rating on the senior unsecured notes is two notches lower than the Ba3 CFR. This reflects their effective subordination to the unrated secured credit facility ($608 million term loan and $400 million revolver). The notes are guaranteed by the company’s domestic operating subsidiaries.

Ratings downgraded:

  • Corporate Family Rating to Ba3 from Ba2;
  • Probability of Default Rating to Ba3-PD from Ba2-PD;
  • $350 million senior unsecured notes to B2 (LGD 5) from B1 (LGD 5);

Rating affirmed:

  • Speculative grade liquidity rating at SGL-2

The rating outlook is negative

Ratings Rationale

Vista Outdoor’s Ba3 Corporate Family Rating reflects its good size for its product niche with revenue around $2.5 billion, but also its high leverage with debt/EBITDA expected to approach 4.5 times. Ratings benefit from Vista’s strong brand recognition with brands such as Federal, CamelBak, and Bell, an expanding base of firearm enthusiasts, and solid market share in ammunition and outdoor products. The rating is constrained by the company’s weak operating performance and the regulatory uncertainty surrounding the gun industry. Because of this uncertainty, Vista’s credit metrics need to be stronger than other similarly-rated consumer durable companies. The rating is also constrained by the company’s focus in ammunition and other shooting related products, and exposure to volatile raw material prices (i.e., copper and lead).

If the company’s operating performance continues to deteriorate the rating could be lowered. Significant changes in gun regulations that reduce gun and accessory sales could also prompt a downgrade. Additionally, debt/EBITDA remaining above 4 times for a prolonged period could result in a downgrade.

An upgrade is possible if Vista can increase revenue and restore its earnings, cash flow and credit metrics in the face of industry uncertainties. Debt/EBITDA approaching 3 times could also lead Moody’s to consider an upgrade.

 

Vista Outdoor, based in Farmington, UT, is a manufacturer and marketer of outdoor sports, recreation products and ammunition. The company produces a broad product line for the camping, hunting, shooting sports, wildlife watching, archery, and golf markets. Major brands include Bushnell, BLACKHAWK!, CamelBak, Savage Arms, Federal Bell, and Giro. Revenue is approximately $2.5 billion.

Photo courtesy Vista Outdoor