Authentic Brands, which owns a portfolio of over 50 brands that include Spyder, Tretorn, Tapout, Prince and Volcom, had its debt rating downgraded and outlook reduced by Moody’s Investors Service due to disruptions caused by the coronavirus.
In a statement, Moody’s affirmed ABG Intermediate Holdings 2 LLC’s B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR). The rating on the company’s first-lien senior secured credit facilities was downgraded to B2 from B1. The rating outlook was changed to stable from positive.
The rating agency said, “The outlook change to stable reflects the disruptions caused by the global spread of the coronavirus (COVID-19), including unprecedented retail store closures and declines in discretionary consumer spending, which will likely pressure Authentic Brands’ licensing revenue and earnings, limiting its ability to improve credit metrics over the next 12-18 months. The downgrade of its senior secured credit facilities reflects Moody’s reduced recovery estimates related to recent deterioration equity valuations. The affirmation reflects Authentic Brands’ typically steady operating performance, strong margins and good liquidity, supported by balance sheet cash that was boosted by recent revolver draw downs, and typically solid free cash flow generation.”
- Senior Secured Bank Credit Facility, Downgraded to B2 (LGD3) from B1 (LGD3)
- Probability of Default Rating, Affirmed B2-PD
- Corporate Family Rating, Affirmed B2
- Changed To Stable From Positive
Moody’s said, “The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The retail and apparel sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Authentic Brands’ credit profile, including its exposure to discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Authentic Brands remain vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on Authentic Brands of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
“The rating reflects governance risks, including financial and M&A strategies that have led to high leverage driven by both its acquisitive nature and financial sponsor ownership. With pro format, Moody’s-adjusted debt-to-EBITDA approximating 4.9 times as of September 31, 2019, financial leverage is high but has improved over the past year through earnings growth and acquisitions funded with cash. The rating also considers the company’s moderate brand and licensee concentrations, and potential for execution challenges associated with its acquisition-based growth strategy.
“The rating also reflects Authentic Brands’ relatively stable and predictable revenue and cash flow streams it receives in the form of royalty payments from its licensees, which include significant contractually guaranteed minimums which augment potential overages (payments made in excess of those amounts). Also, its inherently asset-light licensor business model carries low fixed overhead costs and supports the company’s strong operating margins and associated free cash flow generation.”
Moody’s said the ratings could be downgraded if the company experiences weaker than anticipated operating performance resulting from challenges in integrating acquired brands, the non-renewal of licenses, or renewals of its licenses at materially lower revenue streams. Specific metrics include debt-to-EBITDA sustained above 6.5 times or EBITA-to-interest sustained below 2.25 times.
The ratings could be upgraded if the company maintains its operating performance and more conservative financial policies through a demonstrated willingness to sustain debt-to-EBITDA below 5.0 times and EBITA-to-interest expense above 2.75 times.
Headquartered in New York, NY, ABG Intermediate Holdings is a brand management company that licenses its numerous brands to others.
According to the company, ABG’s portfolio of brands generates $9.3 billion in annual retail sales and includes Marilyn Monroe, Mini Marilyn, Elvis Presley, Muhammad Ali, Shaquille O’Neal, Sports Illustrated, Dr. J, Greg Norman, Neil Lane, Thalia, Michael Jackson (managed brand), Nautica, Aéropostale, Juicy Couture, Vince Camuto, Herve Leger, Judith Leiber, Frederick’s of Hollywood, Nine West, Frye, Jones New York, Louise et Cie, Sole Society, Enzo Angiolini, CC Corso Como, Hickey Freeman, Hart Schaffner Marx, Adrienne Vittadini, Taryn Rose, Bandolino, Misook, 1.STATE, CeCe, Chaus, Spyder, Tretorn, Tapout, Prince, Volcom, Airwalk, Vision Street Wear, Above The Rim, Hind, Thomasville, Drexel and Henredon.
The company is majority-owned by private equity firms, with affiliates of BlackRock being the largest shareholders, followed by General Atlantic, Leonard Green, Lion Capital, Simon Property Group, management and other co-investors. Authentic Brands is privately owned and does not publicly disclose its financial information.
Photo courtesy Authentic Brands