Moody’s Investors Service affirmed Toms Shoes, LLC’s Caa3 Corporate Family Rating (CFR) and Caa3 senior secured first lien term loan rating. Concurrently, Moody’s downgraded the company’s Probability of Default Rating (PDR) to Caa3-PD from Caa2-PD. The outlook was changed to stable from negative.
“Although Toms’ turnaround has gained traction over the past year and we expect further positive momentum from the Stand for Tomorrow campaign, we believe leverage is unlikely to improve to a sustainable level prior to the company’s 2020 debt maturities,” said Moody’s analyst Raya Sokolyanska.
The affirmations of the Caa3 CFR and term loan ratings reflect Moody’s higher recovery rate assessment in the event of potential default, which was driven by the company’s better earnings performance. However, the PDR downgrade to Caa3-PD from Caa2-PD reflects Moody’s view that the probability of an event of default, including a potential distressed exchange, has increased as a result of the approaching 2020 debt maturities and continued high leverage.
The change in outlook to stable from negative reflects Moody’s view that the probability of a default over the next 12 to 18 months is already appropriately reflected in the Caa3 rating.
Moody’s took the following rating actions for Toms Shoes, LLC:
— Corporate Family Rating, affirmed Caa3
— Probability of Default Rating, downgraded to Caa3-PD from Caa2-PD
— $306.5 million Senior Secured Term Loan due 2020, affirmed Caa3 (LGD3), from Caa3 (LGD5)
— Outlook, changed to stable from negative
The Caa3 CFR reflects Moody’s view that Toms’ capital structure is unsustainable at present and that there is a low likelihood of Toms’ growing earnings to a level that would support a successful refinancing of its entire debt capital structure prior to the 2020 debt maturities. The rating also reflects the company’s weak liquidity profile over the next 12-18 months, including Moody’s projections for breakeven free cash flow and constrained revolver availability during peak periods. The rating also incorporates Toms’ small scale, high fashion risk and limited revenue diversification compared to the majority of rated apparel peers, with about half of revenue derived from the alpargata line.
At the same time, the rating benefits from the company’s earnings recovery in 2018 and Moody’s expectations for continued improvement in 2019 driven by Toms’ new marketing campaign. The rating also incorporates the cash infusions received from the company’s shareholders, provided in the form of $27 million related party revolving notes in 2017 and $5 million related party promissory notes in Q1 2019.
The ratings could be downgraded if the likelihood of default increases or Moody’s recovery estimates decline.
The ratings could be upgraded if Toms refinances its capital structure, or materially improves its earnings and reduces its debt levels, for instance, through a cash equity infusion from its sponsors, such that the likelihood of refinancing its entire capital structure at par significantly increases.