Moody’s Investors Service affirmed Bass Pro Group’s Ba3 corporate family rating, Ba3-PD probability of default rating and B1 senior secured rating.
The outlook is positive. The company proposes to increase its existing term loan due 2024 by $800 million. The proceeds of the proposed add-on term loan, drawings on the company’s asset back revolver ($650 million) and cash on hand, will be used to redeem approximately 64 percent of preferred equity ($1.3billion) issued by Bass Pro’s parent and make a distribution to shareholders. The ratings are subject to final terms and conditions.
The affirmation reflects improving margins (pro-forma for the 2017 acquisition of Cabela’s) due to synergy realization ahead of plan and higher-than-expected debt repayment since the acquisition closed resulting in better than expected improvement in pro-forma credit metrics. Margin improvement has more than offset a decline in revenues (driven principally by the hunting and shooting segment) in the first half of 2018.
These negative trends have started to decelerate and are expected to moderate in the second half. While pro-forma adjusted debt/EBITDA will rise to about 5.6x as a result of the proposed transaction, Moody’s expects Bass Pro will repay debt from free cash flow generated in the fourth quarter thereby reducing adjusted debt/EBITDA to approximately 5.0x by year-end 2018. The positive outlook reflects Moody’s view that EBITDA will increase materially in 2019 from continued cost and margin synergy realization, contribution from the combined loyalty credit card program on flat retail sales. Material debt reduction from growing free cash flow is expected to be used to repay debt resulting in improvement in credit metrics over the next year.
Outlook Actions:
..Issuer: Bass Pro Group, L.L.C
….Outlook, Remains Positive
Affirmations:
..Issuer: Bass Pro Group, L.L.C
…. Probability of Default Rating, Affirmed Ba3-PD
…. Corporate Family Rating, Affirmed Ba3
….Senior Secured Bank Credit Facility, Affirmed B1 (LGD4)
Ratings Rationale
The company’s Ba3 Corporate Family Rating reflects increased consumer participation in outdoor recreational activities that creates a stable demand environment for most of Bass Pro’s products, the company’s very broad product offerings, increased earnings contribution from the loyalty credit card program and demonstrated ability to profitably grow its asset base. The acquisition of Cabela’s Incorporated in late 2017 has many strategic benefits, as it combines two premier specialty brands in the outdoor sporting goods industry. The rating also considers the discretionary nature of many products, particularly boats, which have highly cyclical demand as well as declining demand for lower margin hunting and shooting products.
Ratings could be upgraded if Bass Pro achieves targeted synergies, including increased contribution from its loyalty credit card program and uses its free cash flow to reduce debt and improve credit metrics before further redemptions of preferred stock. An upgrade would require the company to demonstrate the ability and willingness to maintain debt/EBITDA (on a Moody’s adjusted basis) around 4.5x. The outlook could be stabilized if operating performance and anticipated debt repayment does not trends toward projected levels in advance of any further redemptions of preferred stock. Ratings could be downgraded if operating performance materially deteriorates or if it appears likely debt/EBITDA will rise and remain above 5.5x on a sustained basis.
