Moody’s Investors Service assigned first time ratings to Canada Goose Inc., consisting of a B1 corporate family rating (CFR), B1-PD probability of default rating, a B2 rating to its proposed $300 million senior secured first-lien term loan B due in 2027, and an SGL-1 speculative grade liquidity rating. The outlook is stable.

Net proceeds from the C$402 million (US$ equivalent) term loan will be used to repay all outstanding under its existing first-lien term loan B of C$155 million, repay C$50 million on its ABL facility, and the remaining C$185 million will be added to cash on the balance sheet.

Ratings Rationale
Moody’s said, “Canada Goose’s B1 CFR is constrained by: (1) its narrow and discretionary luxury product, which is subject to volatile trends and economic downturns; (2) its seasonal business with small scale; (3) social concerns around its use of animal products; (4) the negative impact of the coronavirus pandemic; and (5) risks with its majority control by private equity. The rating benefits from (1) a strong brand; (2) leverage (pro forma adjusted Debt/EBITDA) of 3.3x at LTM Q1/F2021, together with expectations that the metric will rise in fiscal 2021 but will be sustained below 4x within 12 to 18 months; (3) very good liquidity; (4) strong margins; and (5) growing geographic diversity.

“The term loan benefits from first priority lien on PP&E and a second priority lien on accounts receivable and inventory. It is rated B2, one notch below the B1 CFR, to reflect its junior ranking behind the company’s ABL facility.

“Canada Goose’s social risk is elevated. The coronavirus pandemic is expected to continue to impact operations in the retail and apparel sector and in turn Canada Goose’s earnings until the virus is controlled or eradicated. Also, social concerns around the use of animal products (fur and down) in its offerings will drive continued negative publicity on the brand.

“Canada Goose’s governance risk is high because a private equity firm is its largest shareholder.

“Canada Goose has very good liquidity (SGL-1). Sources approximate C$665 million while uses in the form of term loan amortization total about C$4 million in the next four quarters. Liquidity is supported by C$345 million of cash when the transaction closes, expected free cash flow of about C$100 million in the next 4 quarters, and about C$220 million of availability under its ABL facility (borrowing base of about C$380 million, matures in June 2024). Canada Goose is subject to a springing fixed charge coverage covenant under its ABL facility and cushion is expected to exceed 300% through the next four quarters should the covenant become applicable. The company has limited ability to generate liquidity from non-core asset sales.

“The stable outlook is based on Moody’s expectations that while the company’s results will be impacted by the coronavirus pandemic in fiscal 2021, meaningful improvement will occur in fiscal 2022 and onwards.”

Photo courtesy Canada Goose