Moody’s Ratings upgraded the backed senior secured rating of the Czech defense and firearms maker company, Czechoslovak Group a.s. (CSG), to Baa3 from Ba1 due to the benefits of an initial public offering.

The outlook remains stable.

CSG, owned by Czech entrepreneur Michal Strnad, is the fourth-largest ammunition producer in the EU and has traditionally been one of the major defense industry producers in Europe. In 2024, the company completed the acquisition of the Kinetic Group, the U.S. manufacturer of small-caliber ammunition, which was part of Vista Outdoor that included the Federal, Remington, CCI, Speer, and Hevi-Shot brands. CSG also owns Fiocchi, the manufacturer of small-caliber ammunition.

Moody’s said in its analysis, “The rating action reflects improvements in the company’s governance structure and policies following its IPO; a fairly conservative financial policy targeting a 30–40 percent dividend payout ratio payable from 2027 based on 2026 performance; a simplified capital structure albeit it remains secured for the time being; and solid operating performance supported by a highly favorable industry outlook for European defense manufacturers.

“We believe that the public listing of shares will significantly support CSG’s transition into a more mature and established corporate entity and one of the major defense companies in Europe. The company has already changed the composition of its Board of Directors to include four independent directors out of nine members, improving the diversity of the decision-making process and reducing the key-man risk associated with the major shareholder, Michal Strnad.

“We also consider that access to the equity capital markets reduces, to some extent, the downside risks for credit investors associated with large-scale acquisitions, as shares can be used as a payment instrument. Furthermore, the €750 million primary equity issuance will directly benefit the company and its creditors by increasing its cash balance and reducing net debt. Looking ahead, the company intends to distribute a conservative amount of dividends in the range of 30–40 percent of net income starting in 2027 (based on 2026 performance), which provides solid financial flexibility to support potential acquisitions and growth opportunities. Furthermore, we understand that CSG intends to keep its net leverage below 2x going forward. The ratio was at 2.1x as of September 2025 but is expected to decline below 1.5x by the end of 2025, pro-forma the €750 million primary equity issuance.

“In addition, part of the secondary proceeds will be used to fully repay the PIK notes at the CSG FIN a.s. level, i.e., above Czechoslovak Group a.s., thereby simplifying the overall capital structure. The capital structure remains secured for the time being, but we expect the company to transition to unsecured debt over time.

“CSG continues to report strong operating performance, with revenue growth of 30 percent on a pro-forma basis in the first nine months of 2025 compared with the same period last year and a similar increase in adjusted operating EBITDA. Compared with year-end 2024, the order backlog increased by 27 percent, reaching €14 billion as of September 2025, equivalent to 2.8x sales. Despite ongoing acquisitions and additional debt issuance, Moody’s-adjusted gross leverage remained around 2.8x as of September 2025, similar to year-end 2024. We expect the company to maintain financial discipline in the coming years and operate with metrics consistent with keeping Moody’s-adjusted gross leverage below 3x.

“A supportive market environment in the European defense industry will continue to drive revenue and earnings growth at CSG. Over the medium term, the company expects a mid-teens organic revenue CAGR and an improvement in operating EBIT margin to 26–28 percent, up from 24–25 percent in 2025. While 2026 will be a capex-intensive year, with around 8.5 percent of sales invested in production capacity, capex intensity is expected to normalize to around 4–5 percent over the medium term. With anticipated normalization of net working capital to below 20 percent in 2026, we also expect CSG to generate solid Moody’s-adjusted free cash flow of €500–700 million per year in 2026/27.

“The rating is mainly supported by CSG’s (1) leading market positions as the second-largest producer of medium and large caliber ammunition in Europe and the largest producer of small caliber ammunition globally; (2) large exposure (around 80 percent of revenue) to defense end markets benefitting from increasing defense spending; (3) high level of vertical integration in ammunition production; (4) good near-term revenue visibility, supported by a €14 billion order backlog as of September 2025, additionally complemented by an €18 billion pipeline; and (5) conservative financial policy targeting a dividend distribution of 30-40 percent of net income starting from 2027.

“The rating is primarily constrained by CSG’s (1) secured capital structure; (2) still developing track record of operating through different market cycles; (3) product portfolio largely concentrated in ammunition, especially from an earnings contribution standpoint (almost 90 percent of operating EBITDA in 2024); (4) history of aggressive growth through acquisitions that will likely continue in coming years; (5) challenging operating environment in the US consumer driven small caliber ammunition market; and (6) large intra-year swings in working capital requiring the maintenance  of a substantial liquidity buffer.

“The stable outlook reflects our expectation that CSG will continue to perform strongly as demand for defense ammunition remains high over the next 12–18 months and beyond, supported by a favorable market backdrop. The outlook also assumes that the company will continue to build a track record of conservative financial management, both in terms of balance-sheet discipline and liquidity management, particularly as it evaluates potential inorganic growth opportunities.”

Image courtesy CSG