S&P Global Ratings said it placed the debt ratings of Authentic Brands Group (ABG) under review for a possible upgrade after the brand licensing powerhouse filed for an initial public offering.
S&P said it expects ABG will use net proceeds to repay a portion of existing debt, depending on the final amount raised, and expects the company’s founder and financial sponsor owners would collectively retain at least 70 percent ownership of the company following the transaction.
S&P placed all ratings on Authentic Brands, including its ‘B’ issuer credit rating, on CreditWatch with positive implications, meaning it could affirm or raise the ratings following the review. The CreditWatch placement is expected to be resolved when the IPO closes and the debt repayment is more certain.
S&P wrote in its analysis, “While net proceeds are to be determined, we believe the company will use a substantial portion to repay borrowings under its first-lien credit facilities. The total amount outstanding as of March 31, 2021, was $1.8 billion. Significant debt repayment could reduce leverage below S&P Global Rating’s-adjusted debt to EBITDA of 4.8x for the 12 months ended March 31, 2021.
“We expect Authentic Brands’ consortium of financial sponsors will retain majority control and that it will operate as a ‘controlled company’ upon completion of the IPO. While the majority control by financial sponsors will constrain the potential upgrade up to one notch, we expect some of the sponsors to sell down their shares over time. We expect Authentic Brands to continue to execute its aggressive acquisition strategy, as it has done historically. The lower debt leverage will give them a bit more financial flexibility to execute larger transactions over time, coupled with continued scale and EBITDA expansion. A clearer understanding of financial policy as a publicly traded company will be a key factor in our CreditWatch resolution.
“We will seek to resolve the CreditWatch placement upon the pricing of the IPO when we can quantify the proceeds used for debt repayment and assess the company’s future financial policy. We could affirm our ratings or raise them (including the issuer credit rating, likely up to one notch).
“We will also reassess our recovery ratings on the company’s first- and second-lien debt once debt reduction is confirmed. We could raise our ratings if Authentic Brands repays a material amount of debt, continues strong operating performance, and we believe management’s financial policies will allow it to sustain leverage of less than 5x over the long term.”
Photo courtesy Authentic Brands Group