Standard & Poors Corp. (S&P) raised Academy Sports’ debt ratings to ‘CCC+’ from ‘SD’ (selective default), as expected, a few days after lowering its rating following the retailer’s repurchase of a portion of its senior secured term loan facility due 2022.
On June 14, S&P lowered its ratings because it viewed the ”repurchases. at less than the original promise, as de facto partial restructuring” and considered it a “distressed exchange.“ Academy repurchased an additional $54.4 million of principal of its senior secured term loan facility due in 2022 at approximately 30 percent lower than par through open market transactions.
At the time, S&P said it would likely raise the ratings on Academy and its debt back to the ‘CCC’ category in the coming days to reflect the risk of a conventional default.
On June 20, S&P said it raised its rating back to ‘CCC+’ “to reflect the risk of conventional default, which incorporates our view of ongoing risks to the company’s business and still very sizable funded debt level.”
Academy’s issue-level ratings on the existing term loan facility was also upgraded to ‘CCC+’, with a recovery rating of ‘4’, from ‘D’, as the rating agency does not expect the company to make additional repurchases of the debt for the remainder of the fiscal year.
The continued negative outlook “reflects our expectation that weak performance will persist and meaningful operational improvement is unlikely in the next 12 months.”
S&P elaborated on its rating change and outlook, “The rating action reflects our view that New Academy’s existing capital structure is unsustainable with its still significant debt burden and our expectation for weak operating performance to continue. We believe the company’s long-term business prospects will continue to face pressure from established e-commerce and big-box retailers.
“The negative outlook on New Academy reflects S&P Global Ratings’ expectation that operating performance will remain weak with continued same-store sales declines and margin pressures over the next year. We believe operating performance will be challenged by heightened competitive landscape, economic weakness in oil and gas dependent markets, and tariffs imposed on products sourced from China.
“We could lower the ratings if the company resumes its debt repayment activity below par in the next 12 months. We could also lower the ratings if same-store sales fall by high-single digits and EBITDA declines by more than 300 basis points, meaningfully reducing free operating cash flow in 2019 and causing the company to heavily rely on the revolving credit facility to fund business operations.
“We could revise the outlook to stable or raise the ratings if we anticipate sustained EBITDA growth and believe the risk of a distressed exchange or proactive debt restructuring is minimal. This could happen if management executes on its merchandising strategy that resonates well, improves its omni-channel capability with enhanced customer experience to drive positive traffic, grow EBITDA in the mid-single digit percent range, and generate meaningfully positive free operating cash flow.”
