Moody’s Investors Service downgraded Compass Group Diversified Holdings LLC’s Corporate Family Rating (CFR) to B1 from Ba3 for the company’s proposed refinancing of existing credit facilities.

As a result of the newly-proposed capital structure, which includes the presence of unsecured notes that will be structurally subordinated to the company’s newly proposed secured debt, the company’s Probability of Default Rating (PDR) has been affirmed at B1-PD, which is in line with the B1 CFR. At the same time, Moody’s assigned a Ba3 rating to the company’s newly proposed senior secured first lien credit facilities ($600 million five-year revolving credit facility and $500 million seven-year term loan B), and a B3 rating to the company’s newly proposed $400 million issuance of eight-year unsecured notes. In addition, Moody’s affirmed the company’s SGL-2 Speculative Grade Liquidity rating. The rating outlook is stable.

Proceeds from the proposed transaction, together with $100 million of funds garnered from a March 2018 preferred equity issuance (unrated by Moody’s), will be used to refinance the company’s existing debt obligations and pay fees and expenses associated with the transaction. At the close of the transaction and subject to receipt of final documentation, Moody’s will withdraw its ratings for the company’s existing senior secured term loan and revolving credit facility, which are being refinanced in connection with this transaction.

According to Brian Silver, Moody’s vice president and lead analyst for the company, “Compass’ one-notch downgrade reflects our expectation that the company’s balance sheet will remain levered in the high 3.0-to-low-4.0 times range and that it will continue to be cash consumptive, owing mainly to dividend outflows, which have increased following $200 million of aggregate preferred stock issuance over the last year.” Silver continued, “However, Compass’ credit profile continues to be supported by its solid industry and product diversification profile, owing to its majority ownership interest in ten subsidiaries, and the refinancing will improve liquidity, which was temporarily weakened following the revolver funded acquisitions of Foam Fabricators and Rimports, as a large proportion of the revolver is effectively being termed-out via this transaction.”

The following ratings have been assigned for Compass Group Diversified Holdings LLC (subject to receipt of final documentation):

  • New $600 million Senior Secured 1st lien Revolving Credit Facility due 2023, rated Ba3 (LGD3)
  • New $500 million Senior Secured 1st lien Term Loan B due 2025, rated Ba3 (LGD3)
  • New $400 million Senior Unsecured Notes due 2026, rated B3 (LGD5)

The following rating has been downgraded for Compass Group Diversified Holdings LLC:

  • Corporate Family Rating, to B1 from Ba3

The following ratings have been affirmed for Compass Group Diversified Holdings LLC:

  • Probability of Default Rating, B1-PD
  • Speculative Grade Liquidity Rating, SGL-2

Outlook Action

The ratings outlook is maintained at stable. 

The following ratings will be withdrawn for Compass Group Diversified Holdings LLC at the close of this transaction (subject to receipt of final documentation):

  • $561 million principal Senior Secured Term Loan B due 2021, currently rated Ba3 (LGD3)
  • $550 million Senior Secured 1st lien Revolving Credit Facility due 2019, currently rated Ba3 (LGD3)

Ratings Rationale

Compass Group Diversified Holdings LLC’s’ ratings are broadly supported by the company’s strong industry and product diversification, which stem from the company’s controlling ownership interest in ten unique businesses, and Moody’s expectation that the company will maintain its financial leverage (debt-to-EBITDA) below 4.5 times over the next 12 to 18 months.

Ratings also incorporate Moody’s expectation that the company will maintain a good liquidity profile, highlighted by access to the company’s new $600 million revolving credit facility. However, the company’s ratings are constrained by the policy of distributing the majority of the company’s operating cash flow to shareholders, as well as the company’s modest, albeit improving, size, with annual revenue pro forma for pending acquisitions of nearly $1.6 billion for the twelve-month period ended December 31, 2017 (FY17).

Also, Moody’s expects the company to make more debt-funded acquisitions that could temporarily increase leverage beyond levels that are appropriate for the B1 CFR, although deleveraging via the sale of a business and/or an equity issuance would be anticipated shortly thereafter. In addition, the company remains exposed to the challenging retail environment, and also faces the potential for headline risk among some of the company’s businesses.

The stable outlook reflects Moody’s expectation that Compass will sustain debt-to-EBITDA below 4.5 times over the next 12 to 18 months. The rating agency expects Compass to continue distributing most of the company’s cash flow to shareholders. The company’s commitment to debt reduction following acquisitions is incorporated in the outlook.

The ratings could be upgraded if Debt-to-EBITDA is sustained below 3.75 times and cash flow from operations-to-debt is sustained above 17.5 percent. Alternatively, the ratings could be downgraded if Debt-to-EBITDA is sustained above 5.0 times, cash flow from operations-to-debt is sustained below 12.5 percent, or there is a material weakening of liquidity.

Compass Group Diversified Holdings LLC (Compass) is a publicly traded company (NYSE: CODI) that holds majority ownership interests in ten distinct operating subsidiaries including 5.11 Tactical, Crosman, Advanced Circuits, Sterno Group, Clean Earth, Arnold Magnetics, Liberty Safe, Ergobaby, Foam Fabricators and Manitoba Harvest.