Moody’s Investors Service assigned an A2 rating to Adidas AG’s proposed €1.0 billion senior unsecured notes, split into two tranches maturing in 2025 and 2029. Proceeds from the notes will be used for general corporate purposes, including the refinancing of Adidas’ €500 million convertible bond due in September 2023.
Moody’s outlook is negative.
Moody’s said in its analysis, “Adidas’ A2 rating reflects the company’s leading position in the global sportswear industry, long track record, significant scale and wide geographical reach; its strong brand recognition in the sportswear industry, supported by product innovations and significant marketing and sponsorship investments; the favorable long-term prospects of the sportswear industry, with increasing health awareness of customers, its good liquidity and conservative financial policies.
“The rating is constrained by Adidas’ recent decline in profits and weaker credit metrics, owing to a deterioration in the macroeconomic environment and specific one-offs, notably exit from Russia, the recent termination of the Yeezy partnership and uncertainty over the extent to which the related loss in revenues and earnings can be compensated by the sale of existing inventories, its exposure to high inflation, weaker consumer demand and difficult trading conditions in China, which will constrain recovery in sales and earnings in the next 12-to-18 months; exposure to the highly competitive apparel and footwear industry, which is characterized by changes in consumer habits, growing digitalization and increasing awareness about sustainability issues; the company’s sales concentration in a single brand; its sizeable commitments to pay fixed sponsorship obligations, which weigh on margins and operating leverage.
“Adidas has posted weak results in Q32022 and significantly revised downward its sales and earnings guidance for 2022, which translates into weaker credit metrics than initially expected and also suggests further deterioration in the macroeconomic backdrop. Moody’s believes that Adidas might not be able to achieve credit metrics commensurate with its A2 rating over the next 12-to-18 months, as reflected in the current negative outlook. Moody’s now expects Adidas’ leverage (Moody’s-adjusted gross debt to EBITDA) to peak above 3.0x in 2022, exceeding the 2.5x threshold to maintain the A2 rating. Moody’s however expects this excess level to be temporary because of the incurrence of around €500 million of non-recurring one-off costs in 2022. Moody’s estimates that more than half of these costs relate to the wind-down of the company’s operations in Russia. Moody’s does not expect these costs to repeat next year, which should support an improvement in earnings and some deleveraging towards 2.5x in 2023.
“Adidas’ liquidity is good and supported by a cash balance of €806 million as of 30 September 2022 and full availability under its committed revolving credit facility (RCF) of €1.5 billion and around €1.3 billion of bilateral credit facilities. Moody’s positively notes the recent maturity extension of the company’s RCF, by one year, to November 2027. Adidas has also reached an agreement in principle to increase the size of its committed RCF to €2.0 billion, from €1.5 billion. Today’s senior unsecured bond issuance and the company’s available liquid sources should be sufficient to cover Adidas’ large seasonal cash flow movements, capital spending of around €700 million per year and short-term obligations of around €1 billion as of 30 September 2022. These short-term obligations include Adidas’ next significant debt maturity, which is a €500 million convertible bond due in September 2023, whose refinancing will be largely financed by today’s bond issuance proceeds.
“Moody’s expects that the weaker earnings, the exceptional costs related to exit from Russia and other one-off developments, and the high inventory levels will translate in a significant negative free cash flow (FCF) generation in 2022, of more than €1 billion. Moody’s nevertheless expects Adidas to maintain good liquidity, underpinned by sufficient cash on balance sheet and an undrawn RCF. Moody’s expects the company will generate at least €700 million of FCF in 2023 helped by a reversal in working capital, notably reduction in inventories, as well as lower dividends.”
“The negative outlook reflects weaker than expected operating performance and expectations that the recovery in credit metrics to the levels commensurate with the rating level will take time. Moody’s could stabilize the outlook if the company demonstrates sustainable improvement in earnings and credit metrics in the next 12-18 months. More specifically, the agency would expect Moody’s-adjusted EBIT margin to recover to around 7 percent (or €1.5 billion) in 2023, and Moody’s-adjusted leverage to return to around 2.5x. Adidas’s failure to demonstrate such improvements within this timeframe would exert further negative pressure on the rating.”
