Moody’s Investors Service downgraded Crocs, Inc.’s senior unsecured notes rating to B2 from B1 due to debt taken on from its acquisition of Hey Dude.
Moody’s also confirmed Crocs’ Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating.
At the same time, Moody’s assigned a Ba2 rating to Crocs’ new $2 billion senior secured term loan. The speculative grade liquidity rating of SGL-2 is unchanged. The outlook is changed to stable from the rating under review. This concludes the review for the downgrade initiated on December 23, 2021.
Moody’s said the new $2 billion term loan along with a $152 million revolver draw and $450 million in equity will be used to complete the acquisition of Hey Dude by Crocs as well as fees and expenses associated with the transaction. The transaction is expected to close in the first quarter of 2022.
Moody’s said, “The Ba3 CFR confirmation reflects governance considerations including Crocs’ commitment to allocate free cash flow to debt repayment until leverage reaches management’s target of 2x (approximately 2.5x on a Moody’s adjusted basis). The downgrade to the unsecured notes rating reflects the $2 billion increase of term loan debt which is ranked ahead of the unsecured notes. The company also plans to utilize its revolver to partially fund the acquisition which is aggressive in Moody’s view. Crocs’ pro forma leverage post-acquisition is moderate with Moody’s adjusted debt/EBITDA of 3.4x for the LTM period ending September 30, 2021. Although pro forma leverage is moderate, debt levels will significantly increase and as such, it is a significant increase from its pre-transaction leverage of 1.3x as of September 30, 2021. Crocs’ operating performance has been very strong in 2021 and this strong performance is expected to continue in 2022.
“Offsetting the leverage increase is enhanced diversification of Crocs’ brand and product assortment within the casual shoe category as the majority of Hey Dude’s sales are attributable to the loafer style. Hey Dude’s margin and cash flow profile are similar to that of Crocs and the company has rapidly grown over the past few years. Global supply chain issues, inflation, freight costs and the discovery of new variants of the coronavirus increases the potential for earnings volatility but Moody’s expects the combined company’s free cash flow generation to remain strong and lead to deleveraging through debt repayment.”
Photo courtesy Crocs/Hey Dude