Moody’s Investors Service downgraded to B3 from B1 the corporate family rating (CFR) of Finland-based sporting goods company Amer Sports Holding 1 Oy.

Concurrently, Moody’s has downgraded to B3-PD from B1-PD the company’s probability of default rating (PDR), and to B3 from B1 the ratings on the €1.7 billion term loan B and the €315 million revolving credit facility (RCF), both borrowed by Amer Sports’ subsidiary Amer Sports Holding Oy. The outlook has been changed to negative from stable for both entities.

“The downgrade to B3 reflects the severe and protracted adverse impact that the coronavirus outbreak will have on Amer Sports’ sales and earnings in 2020, resulting in a sharp spike in its already elevated leverage,” says Igor Kartavov, a Moody’s lead analyst for Amer Sports. “Weakening cash flow generation creates imminent risks for the company’s liquidity, including a likely breach of its maintenance covenant and a possible cash shortfall in the second and third quarters of 2020,” adds Mr. Kartavov.

Ratings Rationale
Moody’s said, “The downgrade of Amer Sports’ ratings reflects the detrimental impact that the worldwide spread of the coronavirus outbreak, particularly across Europe and North America, is having and will continue to have on the company’s business in 2020. Amer Sports’ products are highly discretionary for consumers, and demand for them is linked to a variety of traveling and sports activities, which are currently restricted in many of the company’s key markets due to the social distancing measures imposed by governments in response to the coronavirus. Moreover, over 80 percent of the company’s products are distributed via offline channels, including sporting goods chains, specialty retailers, fitness clubs and own branded stores, most of which have been temporarily shut down.

“The impact of the growing spread of coronavirus on Amer Sports’ financial and operating results is currently difficult to estimate because of the significant pace of negative developments, which creates uncertainty regarding the duration and severity of containment measures adopted by various countries.

“Moody’s base case incorporates the assumption that the company’s revenue in 2020 will decline by over 20 percent year-on-year. Although the company is implementing a comprehensive set of measures to reduce operating costs in response to the deteriorated operating environment, it will be challenging for the company to fully offset the sharp decline in revenue in 2020. As a result, Moody’s expects that Amer Sports’ leverage, measured by Moody’s-adjusted gross debt to EBITDA ratio, will exceed 10x in 2020, up from an already high level of 7.9x estimated by the rating agency for 2019. This increase in leverage mainly results from an abrupt drop in EBITDA, which Moody’s estimates at around 40 percent year-on-year, assuming a gradual recovery in sales and earnings in the second half of the year, which normally accounts for 60 percent of Amer Sports’ annual revenue and 80 percent of its EBITDA.

“Amer Sports’ B3 CFR factors in (1) the company’s aggressive capital structure and very high leverage of 7.9x in 2019, expected to peak at double-digit values in 2020; (2) uncertainty related to the pace of recovery in the company’s performance after the coronavirus outbreak is tamed, because of the highly discretionary nature of its products; (3) weak liquidity, exacerbated by significant seasonality of earnings and net working capital, and a likely covenant breach in 2020; and (4) significant capital spending and marketing expenses required to implement expansion in China, which put pressure on margins and free cash flow.

“The company’s rating continues to incorporate (1) its leading market positions supported by a large and diversified portfolio of globally recognized brands, and its large scale; (2) its broad diversification across sports segments and geographies; (3) favorable long-term demand dynamics in the outdoor and sports market, with additional growth potential from expansion into the direct-to-consumer channel of the Chinese outdoor apparel market; and (4) strategic guidance and potential financial support from Anta Sports.’

Liquidity
Moody’s said, “The deterioration in earnings in 2020 creates imminent risks for the company’s liquidity. As of 31 December 2019, Amer Sports had €306 million of cash and €119 million available under the RCF. However, the company has to repay around €167 million of legacy bank loans in the first half of 2020. In addition, part of the consolidated cash is held at the level of operating subsidiaries based in emerging markets, and may not be immediately available for general corporate purposes. The company’s business is highly seasonal, with negative EBITDA and operating cash flow typically generated in the second quarter of the year. Moody’s expects that the large negative cash flow in the second quarter of 2020, exacerbated by implications of the coronavirus outbreak, will require Amer Sports to fully draw down its RCF and will significantly erode its cash cushion. Moody’s also notes the high uncertainty related to the company’s networking capital evolution, particularly with respect to the accumulation of unsold inventories and accounts receivable from distributors. Amer Sports faces significant net working capital seasonality, with large outflows in the third quarter of the year, which will put further stress on its liquidity.

“The company’s RCF contains a maintenance covenant of senior secured net leverage not exceeding 8.0x, tested when the facility is over 40 percent utilized. Moody’s expects that Amer Sports’ leverage will exceed this threshold as of 30 June or 30 September 2020. While the covenant breach can be remedied via a waiver or an equity cure, the company has not made any such arrangements so far.

“Amer Sports is owned by a consortium led by Chinese sportswear company ANTA Sports Products Limited (ANTA Sports). Given the size and strategic importance of this investment for ANTA Sports, as well as its strong financial position, Moody’s considers it likely that the shareholders may provide financial support to Amer Sports in case of extraordinary liquidity pressure. Moody’s understands that Amer Sports has already reached an agreement not to make a €11.5 million dividend payment in March 2020 to service the interest on a loan raised outside of the restricted group. However, any further support from the shareholders remains uncertain at this stage.”

Rationale For Negative Outlook
Moody’s said, “The negative outlook reflects Moody’s view that the decline in revenue may be more severe than the rating agency currently expects, because of the unpredictable nature of the current operating environment. The negative outlook also reflects Moody’s view that it will be challenging for the company to achieve the planned cost reduction to the full extent and in a timely way, and that it may face a significant networking capital absorption, which will exert additional pressure on its already strained liquidity. The negative outlook also captures the uncertainty related to the recovery in Amer Sports’ performance beyond 2020, including its ability to reduce leverage from a very high level expected in 2020.”

Factors That Would Lead To An Upgrade Or Downgrade Of The Ratings
An upgrade of Amer Sports’ ratings is currently unlikely, given the negative outlook, the challenging operating environment and the uncertainty related to consequences of the company’s likely covenant breach. Positive pressure on the company’s ratings might build up over time if it (1) improves liquidity and maintains at least moderate headroom against the covenant threshold; (2) demonstrates a consistent revenue and EBITDA recovery path; (3) reduces its leverage, measured by Moody’s-adjusted gross debt to EBITDA ratio, towards 6.5x on a sustainable basis; and (4) returns to positive free cash flow generation.

The ratings could be downgraded further if the company’s credit metrics deteriorate beyond Moody’s current expectations or remain at very high levels beyond 2020, due to more protracted implications of the coronavirus outbreak or the company’s failure to adjust its cost base in response to an abrupt revenue drop. Quantitatively, this would translate into Amer Sports’ leverage remaining above 8.0x in 2021. The ratings would come under immediate negative pressure if the company’s liquidity further deteriorates, such as if the likelihood of cash shortfall increases or if the covenant breach occurs and is not remedied.

Domiciled in Helsinki, Finland, Amer Sports’ brands include Salomon, Arc’teryx, Peak Performance, Atomic, Suunto, Wilson and Precor. In 2019, Amer Sports generated revenue of €2.9 billion (2018: €2.7 billion) and EBITDA of €286 million (2018: €301 million).

Photo courtesy Amer Sports