Moody’s Investors Service changed to stable from negative the outlook on the debt ratings of Amer Sports Holding on its expectations that sales and earnings will recover this year after both declined in 2020 due to the pandemic.

Concurrently, Moody’s affirmed the company’s B3 corporate family rating (CFR) and B3-PD probability of default rating (PDR). Moody’s has also affirmed the B3 ratings on the €1,800 million guaranteed senior secured term loan B tranches (TLB) due 2026 and the €315 million guaranteed senior secured revolving credit facility (RCF) due 2025, both borrowed by Amer Sports’ subsidiary Amer Sports Holding Oy.

“The stabilization of the outlook reflects our expectation that Amer Sports’ operating performance will gradually recover from the unprecedented shortfall in sales and earnings which hit the company during 2020 owing to the coronavirus outbreak,” said Giuliana Cirrincione, Moody’s lead analyst for Amer Sports. “While the company’s credit metrics will remain weak over the next 12-18 months, the change in outlook to stable from negative also reflects the recovery potential supported by its strong business profile and its improved liquidity profile, supported by a healthy cash balance and the cash proceeds from the recent sale of its fitness equipment business.”

Amer Sports’ brands include Salomon, Arc’teryx, Peak Performance, Atomic, Suunto, Wilson, Precor, Armada, ENVE Composites, Louisville Slugger, DeMarini, and Sports Tracker.

In its analysis, S&P wrote, “Amer Sports’ operating performance in 2020 was severely hurt by the coronavirus outbreak, with a drop in sales and company-adjusted EBITDA (i.e. before non-recurring items and IFRS 16 impact) of 16 percent and 23 percent, respectively, compared to 2019. Consumer demand for sports apparel, footwear and individual ball sports equipment rebounded in the second half of 2020, supported by retail growth in China and strong e-commerce expansion. However, this was not enough to offset the decline in other business segments like winter sports, team ball sports, sports instruments, and fitness equipment, which are more exposed to social distancing rules and restrictions imposed to curb the pandemic.

“As a result, Amer Sports’ financial leverage, measured as Moody’s adjusted gross debt to EBITDA, increased to 10x in 2020 from 8.4x in 2019, and Moody’s adjusted EBIT margin fell to 2.9 percent from 6.4 percent. Positively, the drop in profitability was mitigated by the company’s ability to achieve net operating costs savings of €120 million savings, while at the same time continuing its retail expansion plan in China.

“Moody’s expects the company’s sales will grow by around 10 percent in 2021, as the positive momentum seen in the second half of 2020 will likely continue. Growth will come mainly from the U.S. and Chinese markets, and trading conditions in EMEA should be supported by the high savings rate among high-earners and continuing pent-up demand. However, the extension of lockdown measures across Europe still represents a key downside to the company’s recovery prospects, as store closures, as well as the ban on ski holidays in most European countries, have continued to curb consumer demand in Q1, especially in the winter sports equipment segment.

“Based on Moody’s forecasts, Amer Sports’ gross leverage in 2021 will decline only slightly below the 2020 levels, thanks to some debt repayment funded with part of the cash proceeds from the sale of its fitness equipment business, completed on April 1, 2021. Adjusted leverage will trend slowly to below 8x over the next 18 months, based on the rating agency’s expectation that substantial earnings growth will only materialize from 2022. This is because profitability in 2021 will likely remain subdued due to high one-off costs related to the company’s ongoing cost restructuring, which will offset the progressive recovery of consumer spending for sporting goods.

“Amer Sports’ B3 CFR continues to be supported by (1) its leading market positions, underpinned by a large and diversified portfolio of globally recognized brands, and large scale; (2) its broad diversification across sports segments and geographies; (3) the favorable long-term demand dynamics of the sporting goods market, with additional growth potential from the company’s expansion into the direct-to-consumer channel of the Chinese outdoor apparel market; and (4) the strategic guidance and potential financial support from its shareholders ANTA Sports Products Limited (ANTA Sports), FountainVest Partners, Mr. Chip Wilson, and Tencent.

“The B3 rating is constrained by (1) the company’s aggressive capital structure, with very high leverage and a weak EBIT-to-interest cover ratio; (2) the exposure to discretionary consumer spending, which adds uncertainty over the pace of earnings recovery; (3) the significant capital spending and marketing expenses required to implement its expansion strategy, which exerts pressure on margins; and (4) negative free cash flow in 2021, expected to only breakeven in 2022 and beyond to sustain the retail expansion.”

“Despite the drop in EBITDA, Amer Sports’ free cash flow generation increased to around €120 million in 2020, from a deficit of €190 million the year before, driven by a steady reduction in working capital, especially account receivables.

“With around €150 million available under its €315 million RCF and €323 million cash balance at December 2020, Amer Sports’ liquidity is adequate. Based on the rating agency’s forecasts, these liquidity sources will be sufficient to cover the company’s cash needs over the next 12-18 months, which include planned Capex of around €160 million annually (i.e. including the portion related to the lease adjustment), mainly to support the ambitious retail expansion plan in China.

“Amer Sports faces significant EBITDA and working capital seasonality, with the largest cash outflows in Q2 and Q3, respectively. The sustained Capex plan, together with a resumption of dividend payments to service the interest on the shareholder loan and more normalized working capital requirements, will lead to a negative free cash flow generation in the range of €80 million – €100 million in 2021, which should improve to become breakeven or only marginally positive going forward.

“Positively, the company’s liquidity will benefit from the approximately €350 million cash proceeds from the sale of its fitness equipment business, completed in early April. These additional liquidity sources will provide some flexibility to manage business seasonality, while €200 million will be applied towards debt reduction in 2021. Amer Sports has a favorable maturity profile, with the RCF and TLB due in 2025 and 2026, respectively.

“The company’s RCF contains a financial covenant of senior secured net leverage not exceeding 8.0x, tested when (1) the facility is used for more than 40 percent of its committed amount, and (2) the company’s cash balance is below a certain level. Given the ample cash balance, the rating agency expects Amer Sports to maintain sufficient capacity under this covenant.”

Structural Considerations
“The B3 ratings assigned to the €1,800 million senior secured TLB due 2026 and the €315 million senior secured RCF due 2025 are in line with the CFR, reflecting that these two instruments rank pari passu and represent substantially all of the company’s financial debt. The TLB and the RCF are secured by pledges over Amer Sports’ major brands, as well as shares, bank accounts and intragroup receivables, and are guaranteed by the group’s operating subsidiaries representing at least 80 percent of the consolidated EBITDA. The B3-PD probability of default rating assigned to Amer Sports reflects the assumption of a 50 percent family recovery rate, given the limited set of financial covenants comprising only a springing covenant on the RCF, tested when its utilization is above 40 percent and the company’s cash balance is below a certain level.”

Rationale For Stable Outlook
“Amer Sports is initially weakly positioned in the B3 category, but the stable outlook reflects Moody’s expectations that its credit metrics will progressively improve over the next 12-18 months, on the back of a demand rebound primarily in the U.S. and China, as well as continued focus on cost savings. The stable outlook also assumes that the company will maintain at least adequate liquidity and comfortable capacity under its financial covenant.”

Photo courtesy Amer Sports/Arc’teryx