Sprint HoldCo B.V., the new holding company of cycling giant Accell Group, received its first credit ratings from S&P Global Ratings and Moody’s.

Accell Group owns the bicycle brands Atala, Babboe, Batavus, Carraro Cicli, Ghost, Haibike, KOGA, Lapierre, Loekie, Nishiki, Raleigh, Sparta, Torker, Tunturi, Van Nicholas, Winora, and XLC components.

Financial sponsor KKR and existing shareholder Teslin Capital Management recently agreed to purchase bike manufacturer Accell Group N.V. for about €1.9 billion in a public-to-private leveraged buyout (LBO). Sprint HoldCo B.V., the new holding company of Accell Group, plans to issue a €700 million senior secured term loan B (TLB) and a €180 million senior secured revolving credit facility (RCF) to acquire the company and refinance the existing debt, while KKR will contribute €1.3 billion of pure equity.

S&P Assigns Preliminary ‘B’ Rating
S&P assigned a preliminary ‘B’ long-term issuer credit rating to Sprint HoldCo B.V., and a preliminary ‘B’ issue rating and preliminary recovery rating of ‘3’, which indicates our expectation of about 65 percent recovery in the event of a payment default, to the company’s proposed €700 million senior secured TLB.

S&P said in its analysis, “Our preliminary issuer credit rating primarily reflects financial-sponsor ownership and a capital-intensive business model. In January 2022, financial sponsor KKR announced its plan to acquire Accell Group in a public-to-private LBO. To finance the transaction, the acquisition vehicle Sprint BidCo B.V. plans to issue a €700 million TLB and a €180 million RCF, which will remain undrawn at closing. KKR will contribute an equity injection of €1.3 billion, representing about 65 percent of the financing needs. Pro forma the transaction, KKR will hold 88 percent of Accell Group, while Dutch investments firm Teslin will retain a 12 percent ownership stake. The issuance will lead to an S&P Global Ratings-adjusted leverage ratio of about 5.3x at the close of the transaction.

“We also note that the offering memorandum reflects KKR’s commitment to a maximum net leverage ratio of 5x, based on structuring EBITDA and excluding any potential drawings under the existing facilities for working capital purposes from the debt definition. The committed threshold corresponds to an S&P Global Ratings-adjusted leverage ratio of about 5.5x-to-5.9x, depending on the RCF and working capital facility drawdowns, which reflects the future leverage trajectory for the company.

“Ongoing supply chain issues are exacerbating liquidity needs and hampering FOCF generation. Accell Group sources batteries from Eastern Europe, frames, and other bike components from Thailand, Vietnam and China and assembles traditional and electric bikes in one of its four European manufacturing sites. Its business model is working capital-intensive and is characterized by elevated intra-year liquidity needs.

“Accell Group witnessed an exponential rise in demand over the past two years of the pandemic, which created bottlenecks at Accell Group’s key suppliers’ level, resulting in delayed production of finished goods and forcing Accell Group to increase the level of inventory to about 40 percent of total sales in 2021 compared with about 20 percent in 2020, to manage timely delivery to its customers. As a result, the company’s change in working capital consumed about €200 million of liquidity last year. Furthermore, ongoing lockdowns and low vaccination rates in Asia are slowing the delivery of components, pressuring the company to increase its already high inventory level. On top of increasing inventory, Accell Group took numerous measures to alleviate the impact of the disruptions, such as reducing the complexity of bike components, enabling parts sharing across various models, multi-sourcing from suppliers located in Europe, and adopting a sales and operational planning (S&OP) approach to manufacturing, allowing for an efficient reorganization of operations. In our base case, we assume supply chain issues will remain in place through 2022 and at least a major part of 2023, hampering cash flow generation at Accell Group. We project reported FOCF after lease payments of about €8 million-to-€10 million for 2022 and 2023, translating into an S&P Global Ratings-adjusted FOCF-to-debt ratio of about 2.5 percent-to-3.0 percent.

“Accell Group’s solid market position will further benefit from electric bike tailwinds, albeit in a fragmented sector. The electric bike market has been growing steadily over the past several years, with a compound annual growth rate (CAGR) of about 25 percent over 2015/19. The COVID-19 pandemic significantly accelerated this growth, with a reported CAGR of about 42 percent in 2020 and 2021. Committed governments’ spending on cycling infrastructure in various European countries, as well as subsidies in place to support the shift of customers toward clean transportation, are fueling the growth of electric bikes (both conventional and cargo), which are considered a means of transportation, rather than sporting and recreational items. We believe Accell Group is well positioned to profit from these tailwinds, thanks to a strong portfolio of 12 proprietary brands, with a clear market segmentation that limits cannibalization.

“Nevertheless, the market is highly fragmented with several established specialized manufacturers such as Trek, Giant, and Merida, competing at a global level for market share. The positive market dynamics are also attracting an increasing number of new entrants, particularly automotive original equipment manufacturers. Prestigious companies, such as BMW, Porsche, and Mercedes-Benz, have recently launched premium e-bikes. They can leverage brand equity and supply chain savvy and are positioned in the upscale segment; however, these rely on the expertise of existing bike manufacturers for the design and distribution of their products.

“The parts and accessories (P&A) segment will doubly enhance Accell Group’s revenue growth and help diversify the distribution network. Electric bikes have an average lifespan of five years, shorter than the average 15 years for traditional bikes. They are dependent on key components which tend to wear out fast, in particular batteries. Due to its established dominant position in key geographies, the P&A segment will significantly contribute to Accell Group’s revenue growth. This segment represents about 30 percent of total revenue and experienced significant growth of about 17 percent CAGR over the past five years. Through its proprietary and third-party brands, Accell Group’s P&A segment is well positioned to capitalize on synergies with the electric bike manufacturing segment. Investing in component complexity reduction will allow Accell Group’s proprietary brands to benefit from a platform approach to services and repairs.

“We also believe these dynamics will support Accell Group’s plans to improve its presence in the direct-to-consumer distribution space, both online and through franchised stores. Given the average selling price of electric bikes and the complexity of the product, brand equity and the need for a close-to-home repair shop are increasingly more important for consumers in this market. We believe that the company’s plan to deploy about 130 stores by 2026, alongside its already strong dealer networks, will build on the company’s knowledge about consumer taste and behavior and differentiate Accell Group further from the competition.

“The final ratings will depend on our receipt and satisfactory review of all final documentation and final terms of the transaction. The preliminary ratings should therefore not be construed as evidence of final ratings. If we do not receive final documentation within a reasonable time, or if the final documentation and final terms of the transaction depart from the materials and terms reviewed, we reserve the right to withdraw or revise the ratings. Potential changes include, but are not limited to, utilization of the proceeds, maturity, size and conditions of the facilities, financial and other covenants, security, and ranking.

“The stable outlook reflects our expectations that Accell Group will continue its revenue and EBITDA growth trajectory, thanks to strong market tailwinds and the pursuit of production efficiency, such that S&P Global Ratings-adjusted leverage will remain stable at about 5x. Despite working capital volatility in the short to medium term, we expect FOCF to remain positive, such that adjusted FOCF to debt will remain stable at about 2.5 percent-3.0 percent in the next 12 to 18 months.”

Moody’s Assigns First-Time B1 CFR to Accell Group
Moody’s Investors Service assigned a first-time B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) to Sprint BidCo B.V. (Sprint or Accell), the parent company of bike-manufacturer Accell Group, as well as a B1 instrument rating to the proposed €700 million guaranteed senior secured Term Loan B due 2029 and new €180 million guaranteed senior secured Revolving Credit Facility (RCF) due 2029 borrowed by Sprint BidCo B.V. to finance the public-to-private acquisition of Accell Group N.V. by a consortium of investors led by Kohlberg Kravis Roberts (KKR).

The outlook on all ratings is stable.

Moody’s said in its analysis, “Accell’s B1 CFR reflects the company’s sustained revenue growth and resilient operating performance supported by the strong demand for bicycles, boosted by the coronavirus pandemic and by positive market fundamentals. Furthermore, the rating is underpinned by Moody’s expectations that Moody’s-adjusted debt/EBITDA will reduce below 5.0x over the next 12-to-18 months, supported by earnings growth. Starting Debt/EBITDA of 5.6x Pro-forma for the new transaction and based on the last twelve months period (LTM) ending March 2022 positions the rating initially weakly in the B1 rating category.

“Accell’s B1 CFR also reflects the company’s:

  1. leading market position in the fragmented European market for bicycles, especially in the e-bikes segment;
  2. strong positive market fundamentals underpinned by growing penetration of e-bikes and cargo-bikes, partly fueled by government incentives;
  3. a broad portfolio of well-known local brands with good geographical diversification and strong historical heritage;
  4. track record of margin expansion with relatively high flexibility of passing prices increases to end costumers;
  5. good liquidity profile supported by a sizable committed revolving credit facility; and
  6. sizeable equity injection by the sponsor.

“Conversely, Accell’s CFR is constrained by:

  1. exposure to the discretionary nature of demand, albeit somewhat mitigated by government subsidies;
  2. 5.6x starting leverage, which is high for the current rating and provides no capacity for operational underperformance compared to Moody’s expectations;
  3. high supplier concentration with 50 percent of the total cost of materials supplied by three companies;
  4. execution risk related to the company’s strategic initiatives to increase efficiency in the value chain and implementation of an omnichannel sales model, which should help to sustain operating margins at least at the 2021 level in 2022 and further improvement thereafter; and
  5. historically volatile free cash flow generation mainly due to swings in working capital; (6) increased competitive pressure from new entrants in the fast-growing e-bike segment.

“The stable outlook reflects the expectation that the strong demand for e-bikes will support the reduction in gross leverage to below 5.0x in Moody’s-adjusted debt/EBITDA in the next 12-18 months.

“Moody’s expects that demand for bikes will hold up in a weaker economic environment and that supply chain shortages will resolve over the next 12-to-18 months, supporting earnings growth. Furthermore, Moody’s expects that margin will soften in 2022 due to inflationary pressure on costs but will return to expand from 2023 onward following the implementation of the strategic initiatives. The stable outlook also assumes no debt-funded acquisition or shareholder distribution.”