Moody’s Investors Service affirmed Hanesbrands, Inc.’s ratings, including its Ba1 corporate family rating (CFR), Ba1-PD probability of default rating (PDR), Baa3 on its secured credit facilities, Ba2 on its unsecured notes. Its SGL-2 speculative grade liquidity rating is unchanged. Moody’s also affirmed HBI Australia Acquisition Co. Pty Ltd’s Baa2 secured debt rating, and Hanesbrands Finance Luxembourg S.C.A’s Ba1 unsecured notes. The rating outlook for Hanesbrands, Inc. was changed to negative from stable.
The outlook change to negative reflects the uncertainty with regards to the duration and severity of the coronavirus spread, and the impact of retail store closures and prolonged reductions in consumer spending on the company’s overall earnings and credit metrics. The affirmation reflects Hanesbrands significant global scale, well-known brands and leading share in the innerwear product category, with a significant portion of the company’s sales derived from more stable subsectors of apparel, such as basic t-shirts, underwear and socks. Hanesbrands’ liquidity is good, supported by approximately $1 billion of cash on hand including a recent revolver borrowing used to augment cash as a precautionary measure.
Rating Rationale
Moody’s said, “The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The apparel sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Hanesbrands’ credit profile, including its exposure to widespread store closures and discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Hanesbrands remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on Hanesbrands of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
“Hanesbrands’ Ba1 CFR reflects its significant scale in the global apparel industry along with the company’s well-known brands and leading share in the innerwear product category. Also considered are Hanesbrands’ double-digit operating margins that are a result of product innovation, a low-cost supply chain, and the company’s ability to successfully leverage its brands. The rating reflects governance risks, including high debt and leverage stemming from debt-financed acquisitions and significant share-repurchases made prior to fiscal 2018; although, the company has since focused on significant debt reduction and leverage improvement. Also considered is Hanesbrands’ significant, but improving, customer concentration with two of its largest customers accounting for 25 percent of its 2019 total net sales, and its exposure to volatile input costs such as cotton, which can have a meaningful and unfavorable impact on earnings and cash flows.”
Ratings could be downgraded if operating performance deteriorates as a result of negative trends in revenues or margin erosion, or a return to more aggressive financial policies. Quantitative metrics include lease-adjusted debt/EBITDA sustained above 4.0x.
Rating improvement is limited by the company’s current financial policy that targets credit metrics at a level too high for an investment-grade rating. A higher rating would require that Hanesbrands demonstrate the ability and willingness to maintain debt/EBITDA (lease-adjusted, as per our calculations) below 3.0 times as well as materially reduce its use of secured debt financing.
Hanesbrands is a manufacturer and distributor of basic apparel products under brands that include: Hanes, Champion, DIM, Maidenform, Bali, Bonds and Playtex, among others. Annual revenue approaches $7 billion.
