Standard & Poors Corp. (S&P) lowered all of its debt ratings on Callaway Golf by one notch to ‘B+’ and placed them on CreditWatch with negative implications. The change was due to its expectation of a “severe slowdown in economic activity and consumer spending” as a result of the COVID-19 pandemic that will reduce Callaway’s sales and EBITDA.
S&P said it expects a significant near-term spike in leverage due to retail store closures and lower demand for discretionary products in second-quarter 2020. While credit metrics are expected to improve substantially in 2021, Callaway will likely sustain leverage above its high-3x downgrade threshold.
The rating agency said the CreditWatch placement reflects the potential for a lower rating over the next few months after the impact of retail store closures and lower consumer spending on Callaway’s sales, profitability, and liquidity are assessed.
S&P said, “The downgrade reflects our belief that Callaway Golf Co. will sustain leverage above our high-3x downgrade threshold as a result of lower profitability caused by the COVID-19 pandemic. Callaway ended 2019 with total S&P Global Ratings-adjusted leverage in the low-3x area, and we had previously expected it would improve to the mid- to high-2x area in 2020. However, the COVID-19 pandemic has led to an unprecedented wave of temporary store closures for Callaway’s retail customers, and consumers are pulling back on discretionary purchases such as golf equipment and apparel. A recent National Golf Foundation survey of frequent golfers who were planning to purchase equipment found that over 50 percent now plans to delay their purchase. We also expect Callaway’s retail customers will delay inventory purchases until they have more clarity on how long their stores will be closed. We believe that store closures and lower consumer spending will result in a significant spike in leverage for Callaway in 2020, well above our high-3x downgrade threshold. Although we expect Callaway’s revenue and EBITDA to recover much of the lost ground in 2021, we believe a global recession and decline in consumer spending will prevent Callaway from returning EBITDA to pre-pandemic levels over the next 24 months. Therefore, we are lowering our issuer credit rating on Callaway to ‘B+’ from ‘BB-‘.
“The CreditWatch placement with negative implications reflects the potential for a lower rating over the next few months after we assess the impact of retail store closures and lower consumer spending on Callaway’s sales, cash flow, and liquidity.
“We will resolve the CreditWatch placement once golf retailers such as Dick’s Sporting Goods Inc. and Golf Galaxy reopen their brick-and-mortar stores and we have more clarity on the magnitude of the second- and third-quarter revenue and EBITDA declines. However, given the uncertainty around the duration of the coronavirus outbreak, including the potential for it to recur after the summer, the ratings could remain on CreditWatch for longer than the 90 days that CreditWatch placements typically indicate. ”
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