Standard & Poors (S&P) upgraded the debt ratings of the parent of 5.11 Tactical, Velocity Outdoor and Liberty Safe due to its significant debt reductions in the past year.

Rating action highlights

  •  U.S.-based Compass Group Diversified Holdings LLC (CODI) significantly reduced its debt burden in 2019 after selling two of its platform investments and applying the net proceeds primarily toward debt repayment, including its $500 million term loan B. Accordingly, its loan to portfolio value (LTV) has improved to around 35% from above 45% in early 2019.
  • S&P is affirming its ‘B+’ issuer credit rating on CODI.
  • S&P is also affirming its ‘BB’ issue-level rating on its senior secured revolver and withdrawing its ‘BB’ issue-level rating on its senior secured term loan B, which it has fully repaid.
  • S&P is raising our issue-level rating on its senior unsecured notes to ‘B’ from ‘B-‘, reflecting improved recovery prospects after the term loan repayment.
  • S&P revised the outlook to positive, reflecting the potential for a higher rating if CODI continues to demonstrate conservative financial policies, such that LTV is sustained below 45%.

S&P said, “The outlook revision reflects CODI’s more conservative investment policies over the past year and focus on debt reduction.  This includes the company’s disposals of Manitoba Harvest and Clean Earth over the past year that, in aggregate, generated over $770 million in proceeds, which were primarily used to repay debt. Pro forma for the company’s recent $115 million issuance of series C preferred shares and subsequent prepayment of its term loan B, LTV improved to about 35%, down from above 45% in early 2019 (per our criteria we give 50% equity treatment to the company’s preferred equity up to 15% of its capital structure; we treat the remainder as debt). We assume management will continue to demonstrate more prudent financial and investment policies based on indications that acquisition multiples remain very high and its concerns over a potential near-term recession, especially since many of the company’s investees are small and vulnerable to economic downturns. However, we need to see a longer track record of prudent financial policies before raising the rating.

“The positive outlook reflects the potential for a higher rating if CODI continues to demonstrate more conservative financial policies. We could raise the rating if LTV is sustained below 45% while cash flow adequacy remains close to 1x. While less likely, we could also raise the rating if the company strengthens its portfolio diversity and significantly improves portfolio liquidity through investments in publicly held assets.

“We could revise the outlook to stable if CODI adopts more aggressive financial policies than we expect such that LTV weakens to 45% or above, or cash flow adequacy deteriorates well below 1x.”

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