Moody’s Investors Service downgraded Boardriders Inc.’s ratings, including the corporate family rating to Caa1 from B3, probability of default rating to Caa1-PD from B3-PD, and secured term loan rating to Caa1 from B3. The outlook is stable.
The downgrade follows a remove by S&P to reduce Boardriders’ outlook to negative.
“The downgrade reflects our expectation that free cash flow will remain negative in fiscal 2020 due to ongoing acquisition synergy spending as well as incremental investments in its new multi-year growth agenda,” stated Mike Zuccaro, Moody’s vice president and senior analyst. “In addition, Boardriders net leverage financial covenant is set to contractually tighten in its first and third fiscal quarters, and with ongoing cash outflows, net debt will likely not improve enough to keep pace, leading to a potential covenant breach if not addressed over the very near term. The company has the support of its sponsor, and is actively in discussions with its bank group.”
Over the past two years, Boardriders has made significant progress integrating its acquisition of Billabong. Profitability and credit metrics have improved largely through the realization of significant synergies, with more expected to come in 2020. However, the costs to obtain these savings have been high, as anticipated, requiring significant uses of cash. Having achieved a large portion of expected synergies, the company has now begun to reinvest back into the business through a series of targeted growth initiatives, which will likely result in continued use of cash in 2020. Given ongoing challenges in the global apparel market, execution risk remains high.
Moody’s took the following rating actions:
- Corporate Family Rating, downgraded to Caa1 from B3
- Probability of Default Rating, downgraded to Caa1-PD from B3-PD
- Gtd Senior Secured Term Loan, downgraded to Caa1 (LGD3) from B3 (LGD3)
- Outlook, remains stable
Boardriders’ Caa1 rating reflects continued execution and integration risks associated with the April 24, 2018 acquisition of Billabong International Limited. Having increased revenue by over 65 percent, the transaction was large; coming on the heels of its February 2016 exit from Chapter 11 bankruptcy and while both companies were in the midst of implementing operational turnaround efforts. While significant integration progress has been made over the past two years, there still remains some level of execution risk in light of ongoing challenges in the global apparel and footwear industry. While potential synergies are significant, and have increased since the transaction closed, the costs to obtain these savings have been high. Continued synergy-related cash outlays, when combined with increased investments related to its growth agenda, will require ongoing uses of cash in fiscal 2020. Net debt will remain elevated due to continued borrowing under its revolving credit facilities.
Positive consideration is given to the strategic benefits of the Billabong acquisition, which combined the two premier companies in the global action sports apparel industry with complementary business philosophies, product offerings and geographic footprints. The company benefits from a larger combined scale that should continue to drive significant cost savings. With a portfolio of well-known brand names, the combined company holds a solid market position in a highly fragmented global industry. Having implemented its turnaround strategy after emerging from bankruptcy in February 2016, Boardriders has developed a track record of success. Moody’s expects continued synergy related gross margin improvement over the next 12-18 months. Credit metrics have improved over the past year, with interest coverage, as measured by EBITA/interest, improving to around 1.5 times and lease-adjusted debt/EBITDA improving to below 4.5 times.
Liquidity is weak given the need to address a potential covenant breach over the very near term. Outside of this, liquidity is supported by Moody’s expectation that balance sheet cash and excess revolver availability, while heavily used, will sufficiently cover cash flow needs over the next 12-18 months.
Consumers are also increasingly mindful of sustainability issues, the treatment of work-force, data protection and the source of the products. While various initiatives may not essentially translate into direct credit implications, over time these factors can impact brand image. Thus, like all retailers, the company will have to continue to work towards sourcing transparency and investments in a sustainable supply chain. To this end, as part of its multi-pillar growth agenda, the company will launch a new centralized sustainability platform to align and strengthen its corporate and brand sustainability efforts.
The stable outlook reflects Moody’s expectation that Boardrider’s leverage will remain moderate and, that the company will address potential covenant issues and maintain adequate liquidity as it implements its integration and growth plans.
Ratings could be downgraded if liquidity deteriorates due to an inability to obtain longer-term covenant relief with ample cushion, or if negative free cash flow intensifies or persists beyond 2020 due to integration-related or other operational challenges.
Ratings could be upgraded if Boardriders is able to address potential covenant issues and generate positive free cash flow. Quantitatively, an upgrade would require EBITA/Interest maintained in excess of 1.25 times.
Boardriders six primary brands including Quiksilver, Billabong, Roxy, DC Shoes, RVCA and Element. The company is majority-owned by funds managed by Oaktree Capital Management, L.P.
Photo courtesy Boardriders