Moody’s Investors Service downgraded Callaway Golf Company’s Corporate Family Rating (CFR) to B1 from Ba3 and Probability of Default Rating to B1-PD from Ba3-PD. Moody’s additionally downgraded the company’s senior secured term loan B to B1 from Ba3. The company’s Speculative Grade Liquidity rating remains SGL-2 and the outlook remains stable.

The downgrade of Callaway’s CFR to B1 reflects the disruption and weakness in the company’s operating results due to the coronavirus, which Moody’s views as a social risk. Temporary government-mandated closures of various operating facilities and retail stores for the company as well as their customers have negatively impacted the company’s revenue and earnings and will remain a headwind. While the sales declines have since abated in recent months, driven largely by a recovery in the golf equipment segment, the impact on the business and the recent convertible notes offering, while shoring up liquidity, will leave the company’s leverage level elevated through 2021. Moody’s also expects a recovery in the competitive apparel business to take multiple years due to higher unemployment and changing consumer buying habits.

The following ratings/assessments are affected by today’s action:

Ratings Downgraded:

  • Corporate Family Rating, Downgraded to B1 from Ba3
  • Probability of Default Rating, Downgraded to B1-PD from Ba3-PD
  • Senior Secured Bank Credit Facility, Downgraded to B1 (LGD4) from Ba3 (LGD4)

Outlook Actions:

  • Outlook, Remains Stable

Ratings Rationale
Moody’s wrote, “Callaway’s B1 CFR reflects the negative impact of the coronavirus on the company’s revenue and earnings resulting in elevated leverage, as well as the company’s concentration in a niche, highly discretionary and cyclical consumer product segment. Callaway’s credit profile is also constrained by the risks associated with its non-golf-related apparel products, an industry with very different and more challenging competitive dynamics than its traditional golf business. Callaway’s credit profile is supported by its leading market position and strong brand name in the golf industry. The credit profile also reflects Callaway’s good liquidity and solid scale with revenue of around $1.5 billion.

“The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody’s regards 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 Callaway of the deterioration in credit quality it has triggered, given its global exposure, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions. A significant number of golf rounds were lost during coronavirus related course shutdowns in March and April, but rounds played are trending meaningfully higher in recent months. Moody’s expects a continuation of the positive trend in the second half of 2020 but that rounds played will moderate as more entertainment options reopen and travel recovers.

“Callaway is publicly traded and has a balanced approach between shareholder distributions and debt repayment. The company has generally kept a conservative financial profile with modest leverage and a small $4 million annual dividend that the company has suspended for the remainder of 2020. Debt and leverage have increased meaningfully in recent years to fund acquisitions including the purchase of Jack Wolfskin in January 2019.”

Photo courtesy Calloway