Academy to Sell Notes to Fund Dividend
Academy Sports & Outdoors is raising $400 million five-year senior notes and will use the proceeds to fund a dividend to its shareholders, according to the debt ratings agency Standard & Poor's.
In August 2011, Academy was acquired by the private equity firm Kohlberg Kravis Roberts & Co L.P. The founding Gochman family retained a minority ownership stake.
Academy had sales of $3 billion last year and currently has more than 150 stores throughout 11 states in the Southeast U.S.
S&P gave a 'B' corporate rating to the issue and affirmed all existing ratings on Academy Ltd., including its 'B' corporate credit rating.
“Although the proposed debt-financed dividend leads to a deterioration of the company's credit profile, we believe that Academy will continue to increase both revenues and profitability, ultimately leading to improved credit measures over the next 12 months, partly mitigating the increase to leverage,” wrote S&P in its report.
S&P said the company has historically “demonstrated relatively stable performance growth” and that is expected to continue in the near term. Wrote S&P, “Operating measures have been above its peers and we expect them to remain so over the near term, even with the addition of debt due to the dividend.”
S&P’s forecast for Academy's operating performance over the next 12 months includes the following assumptions:
Low single-digit same-store sales increases and new store growth, leading to revenue gains in the low-double digits for 2013;
Modest improvement in EBITDA margins due to operating efficiencies and gains from continued supply chain improvements;
Positive free cash flow generation even though capital spending is expected to increase to fund new store growth;
Operating lease obligations to grow in the high-single digits.
With the increase in debt, S&P now expects debt leverage to decline to the high-5x area, with interest coverage to increase to about 2.5x and funds from operations (FFO) to debt to be approximately 12 percent over the next 12 months.
“Although we anticipate some improvement over the near term because of moderate performance gains, we do not expect a meaningful strengthening of the company's credit protection measures due to possible future increases of debt to fund additional dividends,” wrote the rating agency.
S&P described Academy’s liquidity position as “adequate.” Cash sources are expected to exceed uses over the next 12 months. Sources of liquidity for the company include projected available borrowing capacity under its $650 million revolving credit facility, excess cash, and funds from operations.
In conclusion, Academy said its ‘stable’ outlook on Academy reflects its expectations for an improvement in credit measures over the next 12 months “albeit at a slower pace because we do not expect margin gains to be as outsized as witnessed in the prior year.”
Revenue gains resulting from positive same-store sales coupled with new store growth, as well as operational gains are likely to benefit the company's credit protection measures, “but we anticipate that it will likely remain highly leveraged with thin cash flow protection measures, given the recent addition
of debt.”
In November, Academy repriced its $836 million covenant-lite term loan. The issuer’s term loan, originally $840 million, was syndicated in July 2011 to help finance KKR’s $2.3 billion acquisition of the retailer, according to highyieldbond.com.
