S&P Global Ratings raised its debt ratings on Birkenstock following debt repayments using proceeds from its recent initial public offering.
S&P’s long-term issuer credit rating on Birkenstock Financing S.a.r.l. was raised to ‘BB-‘ from ‘B+’. At the same time, the issue rating on the group’s €685 million-equivalent senior secured term loan outstanding due 2028 was increased to ‘BB’ from ‘B+’ (one notch above the issuer credit rating) with a recovery rating of ‘2’ (recovery prospects of 75 percent). S&P also raised its issue rating on the €430 million senior unsecured notes due 2029 to ‘B’ from ‘B-‘ with a recovery rating of ‘6’ (recovery prospects of 0 percent).
S&P’s stable outlook reflects its expectation that Birkenstock will continue to generate healthy and recurring positive free operating cash flow (FOCF) and continue its deleveraging path in line with its stated conservative financial policy. Under S&P’s base case, ongoing sound operating performance is expected to allow Birkenstock to maintain S&P Global Ratings-adjusted debt to EBITDA well below 4.0x on a sustained basis.
S&P wrote in its analysis, “Post IPO, Birkenstock reduced its financial debt, resulting in expected S&P Global Ratings-adjusted leverage below 3.5x for fiscal year 2023, ended September 30, 2023, from about 5.7x in fiscal 2022. On October 11, 2023, Birkenstock completed its IPO on the New York Stock Exchange, offering a total of 32.3 million ordinary shares, of which 21.5 million were sold by existing shareholders (L Catterton, family, and management). This resulted in a market capitalization of about €7.2 billion. Post completion of the IPO, the group repaid a total of €520 million equivalent on its debt using the net proceeds from the IPO and cash on hand. In particular, the debt repayment includes a reduction of €100 million on its shareholder loan maturing in 2029 and of €420 million equivalent on its U.S. dollar term loan B maturing in 2028. The outstanding amount under the shareholder loan is about €190 million (including payment-in-kind interests) and about €310 million under the U.S. dollar term loan B. The outstanding balances under the €428.5 million of senior unsecured notes due in 2029 and the €375 million term loan B due in 2028 remain unchanged. The solid operating performance posted during fiscal 2023, together with voluntary debt repayments, will reduce S&P Global Ratings-adjusted leverage to about 3.3x in 2023 and below 3.0x from 2024, while strengthening adjusted funds from operations cash interest coverage ratio within the 6.5x-7.0x range for fiscal 2024. These credit metrics are consistent with the ‘BB-‘ issuer credit rating.
“We expect a more conservative financial policy, although financial sponsor L Catterton retains control. Post IPO, the listed company Birkenstock Holding PLC (parent company of the rated entity) has a free float of about 13.4 percent of its share capital and is 5.5 percent owned by Financière Agache (holding company of the Arnault family). The remaining equity stake is owned by the existing shareholders (including L Catterton, family, and management) under BK LC Lux MidCo S.à r.l. We understand that post-IPO, financial sponsor L Catterton owns less than 80 percent of the listed entity’s capital.
“Given the group’s track record of conservative financial policy and the publicly stated objective to continue deleveraging to achieve a net leverage ratio of below 2.0x (according to company’s calculation) within the next 18 months and below 1.0x in the longer term, we believe Birkenstock will continue to implement a prudent approach in terms of capital allocation while maintaining S&P Global Ratings-adjusted debt to EBITDA well below 4.0x, significantly lower than the post-leveraged buyout level of above 7.0x. Thus, we have revised upward our assessment of Birkenstock’s financial policy. That said, we note that L Catterton will remain the controlling shareholder, progressively relinquishing control over the medium term.
“Our assumptions reflect S&P Global Ratings-adjusted EBITDA of about €450 million-€460 million in 2023 and €515 million-€525 million in 2024, and adjusted debt of about €1.5 billion. Our adjusted debt calculation includes about €1.3 billion equivalent of financial debt coupled with €140 million of lease liabilities. In line with our methodology, we do not net any cash from the adjusted debt considering the group remains controlled by financial sponsor L Catterton.
“Moreover, we also believe Birkenstock will be able to preserve ample liquidity headroom thanks to €200 million available committed credit facilities (an asset-backed loan) and anticipated positive and recurring cash flow generation. In our base case, we anticipate that Birkenstock has sufficient liquidity available to fund its day-to-day operating needs and future growth and to meet its financial commitments and covenant tests.
“We expect solid operating performance over fiscal 2023, supported by good momentum in the first nine months, with organic revenue growth of about 21 percent year on year. For the nine months to June 30, 2023, the company continued to deliver sustained performance, reporting revenue growth of 21.0 percent, with total sales reaching €1.0 billion, and an adjusted EBITDA margin of 34 percent (adjusted for unrealized foreign exchange losses). Double-digit revenue growth was supported by both direct-to-customer (DTC) and business-to-business channels, driven by a product mix shift to higher-priced products (closed-toe shoes), a channel mix shift to DTC with higher average selling price (accounting for 37 percent of sales versus 34 percent in the nine months ended June 30, 2022), as well as higher units sold. Asia Pacific, Middle East, and Africa had the strongest growth, with 32 percent reported revenue increase, supported by a jump in DTC sales, followed by Europe (24 percent rise) and America (18 percent), driven by a good volume/price mix. Reported EBITDA margin was stable, around mid-thirty percent, despite increased pressure on cost of goods sold due to product mix shifting as well as inflation on raw material prices and salaries.
“The stable outlook reflects our expectation that Birkenstock will continue to generate healthy and recurring positive FOCF and continue its deleveraging path in line with its stated conservative financial policy. Under our base case, we expect ongoing sound operating performance that will allow the group to maintain S&P Global Ratings-adjusted debt to EBITDA well below 4.0x on a sustained basis.”
Photo courtesy Birkenstock
