The corporate family debt ratings of the parent of 5.11 Tactical, Velocity Outdoor and Liberty Safe were upgraded to Ba3 from B1 and the probability of default rating (PDR) lowered to Ba3-PD from B1-PD.

Concurrently, Moody’s upgraded the senior secured revolving credit facility rating of Compass Group Diversified Holdings LLC (CODI) to Ba2 from Ba3 and the senior unsecured notes rating to B2 from B3. The speculative grade liquidity rating remains SGL-1. The outlook is stable.

Moody’s said this concludes the review for upgrade that was initiated on November 26, 2019, following the announcement of preferred equity issuance and repayment of the term loan in November 2019.

Moody’s said, “The upgrade reflects Compass’ strengthened balance sheet following the repayment of a $299 million term loan and management’s public commitment to a more conservative financial policy that targets leverage of 2.5x to 3x (as per the credit agreement). It also reflects Moody’s expectations that the company will pursue a prudent acquisition strategy while maintaining financial flexibility and moderate leverage below 4x Moody’s adjusted debt-to-EBITDA.”

The rating agency elaborated, “Compass’ Ba3 CFR is supported by moderate leverages of 2.4x debt-to-EBITDA, solid industry and product diversification resulting from its controlling ownership in eight businesses and very good liquidity. It also reflects a publicly stated commitment to a more conservative financial policy and Moody’s expectations that the company will maintain debt-to-EBITDA below 4x. The rating remains constrained by the company’s policy of distributing the majority of its operating cash flow to shareholders and the expectation for future debt-funded acquisitions, specifically platform purchases of material size as opposed to bolt-ons, that could temporarily increase leverage above the stated target. However, if that were to occur, Moody’s expects the company to deleverage in relatively short order, either via the issuance of additional equity or sale of a business.

“The stable outlook reflects Moody’s expectations that Compass will sustain debt-to-EBITDA below 4x over the next 12 months. Moody’s expects Compass to continue to distribute most of its cash flow to shareholders and pursue add-on acquisitions over the next 12 months but remains committed to debt reduction following such acquisitions.

“The SGL-1 reflects Compass’ very good liquidity supported by a cash balance of about $50 million, full availability under its $600 million revolving credit facility and access to alternate liquidity sources.

“Moody’s could downgrade the ratings if the company revises its business strategy and targets acquisitions that do not have stable cash flow or if Compass significantly increases debt to fund a distribution or share repurchase. Quantitatively, this could be represented by debt-to-EBITDA approaching 4x, and/or EBIT-to-interest below 2x.

“Although not likely in the near term, Moody’s could upgrade the ratings if Compass demonstrates steady revenue growth while maintaining debt-to-EBITDA below 2.5x and free cash flow to debt above 10 percent.”

CODI’s portfolio includes 5.11 Tactical, Advanced Circuits, Arnold Magnetic Technologies, Velocity Outdoor, ERGObaby, Foam Fabricators, Liberty Safe, and Sterno Products.

Photo courtesy CODI