Moody’s Investors Service has assigned an A2 rating to the proposed senior unsecured notes issued by Adidas AG, consisting of €500 million notes due 2024 and €500 million notes due 2035. Adidas’ current A2 long-term issuer rating and Prime-1 (P-1) short-term issuer rating are unaffected by the issuance of these notes. The outlook on Adidas is unchanged at stable.

The net proceeds from the new notes will be used for general corporate purposes and to pre-fund upcoming and medium-term debt maturities.

“Adidas’ debt issuance is further evidence of the company’s prudent financial and liability management because it will pre-finance medium-term debt maturities, meaningfully extend its debt maturity profile and further strengthen its already good liquidity, a credit positive during these uncertain times”, said Guillaume Leglise, a Moody’s Assistant Vice-President-Analyst and lead analyst for Adidas.

Ratings Rationale
The A2 debt rating assigned to today’s €1 billion bond issuance is in line with the A2 long-term issuer rating of Adidas. Adidas’ A2 rating reflects (1) the company’s leading position in the global sportswear market and wide geographic diversification, with €23.6 billion of revenues in 2019; (2) its strong brand recognition in the apparel and footwear industry supported by product innovations and significant marketing and sponsorship investments; (3) the positive long-term prospects of the industry with increasing health awareness of customers and increased sports participation rates in key emerging markets, such as China; (4) its solid track record of sales growth and operating margin improvement over the last five years; and (5) its low gross leverage, good liquidity and conservative financial policies.

Adidas’ rating also incorporates (1) the impact of the coronavirus outbreak, which Moody’s anticipates will weigh on the company’s earnings and debt protection ratios in the next 12 months; (2) its exposure to the highly competitive apparel and footwear industry, which is characterized by changes in consumer habits, growing digitalization and increasing awareness over sustainability issues; (3) the company’s sales concentration on a single brand; (4) the company’s sizable commitments to pay fixed sponsorship obligations; and (5) the challenges related to the turnaround of Reebok, notably in the US market.

Moody’s views today’s transaction favorably because the issuance will be used to pre-fund medium-term debt maturities and it extends the company’s debt maturity profile. This also reinforces Adidas’ liquidity profile, with additional cash on the balance sheet, at a time when trading conditions remain challenging and the pace of sales recovery remains uncertain. This transaction is a first step in the company’s objective to replace its €3 billion syndicated revolving credit facility with Kreditanstalt fuer Wiederaufbau (KfW, Aaa stable). Moody’s expects Adidas will replace its KfW facility by a new multiyear committed syndicated credit facility and the issuance of long-term bonds over time. As of the end of June 2020, the company had total liquidity of €5.2 billion, including a cash balance of €2 billion, €230 million available under its existing committed credit facilities and full availability under its €3 billion KfW credit line. Adidas’ next significant debt maturity is October 2021, when E600 million of senior unsecured notes are due.

Ratings Outlook
The stable outlook reflects Moody’s expectations that Adidas will retain strong credit metrics over time, despite the material impact of the coronavirus crisis on its earnings and cash flows in 2020. The outlook reflects Moody’s expectations that (1) a gradual recovery in the company’s revenues over the course of the next 12-to-18 months will result in its credit metrics returning towards their pre-crisis levels from 2022 and (2) Adidas’ liquidity will remain good.

Photo courtesy Adidas