Moody’s Investors Service downgraded Academy, Ltd.’s Corporate Family Rating (CFR) to Caa2 from Caa1 and Probability of Default Rating (PDR) to Caa3-PD from Caa1-PD. Concurrently, Moody’s affirmed the company’s Caa2 senior secured term loan rating. The rating outlook remains negative.
The CFR and PDR downgrades reflect Moody’s expectations that the company’s approaching July 2022 term loan maturity, high leverage and expected COVID-19-driven earnings declines in 2020, would increase the likelihood of a transaction that Moody’s could view as a default, including a material discounted debt repurchase.
The affirmation of the term loan rating reflects Moody’s view that the company’s enterprise value, relative to its debt levels, would support an above-average family recovery in an event of default. Moody’s expects the company to maintain good liquidity and perform better than many other retailers due to its broad and value-priced assortment. The vast majority of Academy’s stores have remained open because it is deemed an essential retailer by most municipalities where it operates.
Moody’s took the following rating actions for Academy, Ltd.:
- Corporate family rating downgraded to Caa2 from Caa1
- Probability of default rating downgraded to Caa3-PD from Caa1-PD
- $1.825 billion ($1.466 billion outstanding) senior secured term loan B due 2022, affirmed Caa2 (LGD3 from LGD4)
Outlook, Remains Negative
- Ratings Rationale
Moody’s said in a press release, “The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The non-food retail sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Academy’s credit profile, including its exposure to discretionary US consumer spending have left it vulnerable to these unprecedented operating conditions and Academy remains vulnerable to the outbreak continuing to spread. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on Academy of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
- “The Caa2 CFR reflects Moody’s expectations for a heightened probability of default as a result of the company’s 2022 debt maturities, high leverage, and projected earnings deterioration in 2020. Although Academy’s value price points and diversified product assortment will mitigate the impact of declining consumer spending, earnings will be impacted by rising promotions and lower revenues in the apparel and footwear business. As a result, Moody’s expects leverage to increase in 2020 from 5.4 times as of February 1, 2020 (Moody’s-adjusted, equivalent to 4.4 times based on funded debt and credit agreement EBITDA). Further, the credit profile incorporates the highly competitive nature of sporting goods retail and the margin pressure faced by the sector from the consumer shift to online shopping. The rating also reflects governance risks, specifically the potential for debt repurchases at a significant discount, which Moody’s could view as a distressed exchange. In addition, as a retailer, Academy needs to make ongoing investments in its brand and infrastructure, as well as in social and environmental drivers including responsible sourcing, product and supply sustainability, privacy and data protection. Academy’s ongoing offering of firearms and ammunition at a time when several large retailers have pulled back also represents a social consideration.
- “At the same time, Academy’s good, albeit somewhat weakened, liquidity over the next 12-18 months provides key credit support. The company had $649 million balance sheet cash as of February 1, 2020 (proforma for the $500 million subsequent ABL revolver borrowing), and an estimated remaining $267 million ABL borrowing capacity before cash dominion limitations. Moody’s expects Academy to have positive free cash flow in 2020, assuming reductions in costs and CapEx spending. In addition, the rating positively considers the company’s scale, solid market position in its regions and the relative stability of its business through recessionary periods due to its value focus and broad assortment. Academy’s improvement in earnings in 2019, as a result of initiatives in merchandising, private label credit card and digital capabilities, also supports its credit profile.
- “The negative outlook reflects the elevated probability of default over the next 12-18 months, as well as the risk that earnings or liquidity could decline more than anticipated.”
Factors That Could Lead To An Upgrade Or Downgrade Of The Ratings
Moody’s said the ratings could be downgraded if earnings and liquidity declines more than anticipated. The ratings could also be downgraded if Moody’s recovery estimates in the event of default decline. The ratings could be upgraded if the company reduces its debt levels and addresses maturities in a cost-efficient manner while maintaining good liquidity.
Photo courtesy Academy Sports + Outdoors