Moody's Investors Service affirmed the B2 Corporate Family and B2–PD Probability of Default Ratings of New Academy Finance Company LLC and assigned a B2 rating to the proposed $1.83 billion senior secured term loan due 2022 to be issued by its operating subsidiary, Academy, Ltd. The ratings outlook is stable.
Proceeds from the proposed term loan, $100 million of revolver borrowing and $120 million of balance sheet cash will be used to refinance all debt in Academy's capital structure, pay a $200 million distribution to shareholders, and pay related fees and expenses. The assigned rating is contingent upon closing of the transaction and review of final documentation.
The following rating was assigned:
— $1.83 billion senior secured term loan due 2022 assigned B2 (LGD 4)
The following ratings were affirmed and will be moved to Academy, Ltd. upon completion of the refinancing:
New Academy Finance Company LLC:
— Corporate Family Rating affirmed at B2;
— Probability of Default Rating affirmed at B2-PD;
The following ratings were affirmed and will be withdrawn upon completion of the refinancing:
New Academy Finance Company LLC:
— Senior unsecured notes due 2018 at Caa1 (LGD 6).
— Senior secured term loan due 2018 at B1 (LGD 3);
— Senior unsecured notes due 2019 at B3 (LGD 5).
“While Academy is increasing leverage and reducing cash to fund a distribution to its shareholders, the company has a demonstrated ability to profitably grow revenue and meaningfully reduce leverage. We expect this to be the case going forward,” said Moody's analyst, Mike Zuccaro. “Lease-adjusted leverage will increase modestly to over 6.0 times with this transaction. However, we expect it will fall below 5.5 times within the next 12-18 months, particularly as the company begins to annualize significant investments made in people, technology and infrastructure in support of future growth.”
Academy's liquidity and interest coverage will also benefit from significant cash interest savings of over $35 million via the refinancing of the higher coupon notes with the term loan.
Academy's B2 Corporate Family Rating is constrained by the high debt and leverage that stem from the August 2011 acquisition by KKR, and the $486 million debt-financed dividend in December 2012 using net proceeds from a $500 million senior note offering. The potential for further debt financed distributions to the private equity sponsor is a key rating constraint. The rating also reflects Academy's limited geographic presence and the potential challenges inherent in its planned ramp-up of new store growth over the intermediate-term. The rating favorably reflects the strength of the company's “Academy Sports + Outdoors” brand, its good market position in the regions where it operates, and its demonstrated ability to maintain profitable growth despite difficult economic conditions over the past several years. Academy's liquidity is expected to remain very good, supported by the expectation that its balance sheet cash, positive free cash flow and excess revolver availability will be more than sufficient to fund working capital, capital spending, and debt amortization over the next twelve months.
The stable outlook reflects Moody's expectation that the company will continue to demonstrate profitable growth through solid returns on new store openings, positive same store sales and improved margins on cost savings initiatives and leveraging of recent investments. Profitable growth could lead to improved adjusted leverage over the next twelve months, however we caution that financial policy is aggressive, as it is dictated by a financial sponsor owner, increasing the risk that further deleveraging may not occur.
Sustained growth in revenue and earnings while maintaining good liquidity could lead to a ratings upgrade. The company would also need to demonstrate the willingness and ability to improve and maintain lower debt leverage through a more conservative financial policy. Specific metrics include adjusted debt to EBITDA sustained below 5.5x and adjusted EBITA to interest over 1.5x.
Academy's ratings could be downgraded if operating performance were to materially decline, or if financial policies were to become more aggressive, leading to sustained deterioration in credit metrics or weaker liquidity. Adjusted debt to EBITDA above 6.5x or adjusted interest coverage falling below 1.25x on a sustained basis could drive a downward rating action.
The principal methodology used in these ratings was Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Through its indirect operating subsidiary, Academy, Ltd., New Academy Finance Company LLC (“Academy”) is a leading sports, outdoor and lifestyle retailer with a broad assortment of hunting, fishing and camping equipment and gear along with sports and leisure products, footwear, and apparel. The company operates 196 stores under the Academy Sports + Outdoors name in Texas and the southeastern United States, generating approximately $4.3 billion of revenues for the twelve months ended May 2, 2015. Academy is owned by an affiliate of Kohlberg Kravis Roberts & Co L.P. (“KKR”) and is the direct subsidiary of New Academy Holding Company, LLC (“Holdco”).