Moody’s Investors Service upgraded the debt ratings of Authentic Brands Group to reflect the conglomerate’s “solid” operating performance, increasing scale benefits and improving debt leverage.
Moody’s said in a statement, “The upgrade reflects ABG’s significant growth in scale over the past several years, with over 50 brands that generate more than $29 billion in global annual retail sales in approximately 150 countries. Operating performance has remained solid, including continued profitable growth, strong margins and free cash flow despite a challenging consumer environment. The upgrade also reflects that ABG has maintained more moderate leverage than in the past despite completing several acquisitions including Reebok in February 2022 and Boardriders in September 2023. Many of ABG’s smaller acquisitions have been financed with cash and the company has also paid down second-lien debt and partially funded the Boardriders acquisition using proceeds received from financial sponsors in recent follow-on equity investments. Pro forma for recent acquisitions and recent debt reduction, Moody’s-adjusted debt/EBITDA remains below 5x and EBIT coverage of interest is around 2.5x.”
Ratings affected include its corporate family rating (CFR) to B1 from B2, probability of default rating (PDR) to B1-PD from B2-PD, and senior secured second lien term loan due 2029 to B3 from Caa1. At the same time, Moody’s affirmed the company’s senior secured first lien term loans, senior secured first lien delayed draw term loan and senior secured first lien revolving credit facility at B1. The outlook was changed to stable from positive.
Authentic’s brand portfolio includes Marilyn Monroe, Elvis Presley, Muhammad Ali, Shaquille O’Neal, David Beckham, Dr. J, Greg Norman, Neil Lane, Thalia, Sports Illustrated, Reebok, Brooks Brothers, Barneys New York, Judith Leiber, Ted Baker, Hunter, Vince, Hervé Léger, Hickey Freeman, Frye, Nautica, Juicy Couture, Vince Camuto, Lucky Brand, Aéropostale, Forever 21, Nine West, Eddie Bauer, Boardriders, Spyder, Volcom, Shark, Tretorn, Prince, Airwalk, Izod, Jones New York, Van Heusen, Hart Schaffner Marx, Arrow and Thomasville.
In its analysis, Moody’s wrote, “Authentic Brands B1 CFR reflects its 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 and potential overages (payments made in excess of those amounts). The company has exhibited steady operating performance over the past few years, including demonstrated resilience through the coronavirus pandemic. In 2020 full-year revenue and earnings grew over 2019 because of collections on a large portion of guaranteed minimum royalties from licensees, e-commerce growth, effective expense management initiatives and acquisitions. Also, its inherently asset-light licenser business model carries low fixed overhead costs and supports the company’s strong operating margins and associated free cash flow generation. Liquidity is good, supported by balance sheet cash, ample free cash flow and excess revolver availability.
“The rating also reflects governance risks, including financial strategies that have led to high leverage driven by both its acquisitive nature and financial sponsor ownership. Moody’s expects ABG to maintain debt/EBITDA of around 5.0x and EBIT/interest of 2.5x over the next twelve to eighteen months. The company also has moderate brand and licensee concentrations and the potential exists for execution challenges associated with its acquisition-based growth strategy.
“The stable outlook reflects Moody’s expectation for consistent operating performance over the next 12-18 months, driven by high margins and strong positive free cash flow. The outlook also reflects Moody’s expectation that the company will maintain leverage below 5x on average through earnings growth and successful integration of acquisitions.”
Photo courtesy ABG
