Moody’s Investors Service assigned a B1 rating to the company’s new senior secured term loan B. The rating agency said Topgolf Callaway plans to simplify its existing capital structure by refinancing and combining its term debt at Topgolf Callaway and Topgolf International, Inc.
Topgolf Internationa was acquired by the company in March 2021 in an all-stock transaction valued at $1.7 billion and the capital structures of these two companies have thus far remained separate. Moody’s said Topgolf Callaway now plans to issue a new $1.1 billion 7-year term loan B, proceeds of which will be used to repay existing debt at both Topgolf Callaway and TGI while also increasing cash on the balance sheet. The company also plans to increase its existing $400 million ABL revolver to $525 million and make it available to both Topgolf Callaway and TGI. Borrowings under the existing $175MM TGI revolver will be paid off with proceeds from the new term loan B and then terminated. There is no impact on TGI’s current ratings or stable outlook. Upon closing of this transaction and repayment of the existing debt, Moody’s will withdraw all ratings at TGI and of the existing term loan at Topgolf Callaway.
Moody’s also affirmed Topgolf Callaway Brands Corp’s Corporate Family Rating (CFR) at B1 and Probability of Default Rating at B1-PD. Moody’s assigned a B1 rating to the company’s new senior secured term loan B. The company’s Speculative Grade Liquidity Rating is unchanged at SGL-2. The outlook remains stable.
Moody’s said, “The affirmation of Topgolf Callaway’s CFR at B1 reflects its good product diversification within its three golf-related business segments, which consist of golf equipment, golf-themed entertainment restaurants, and apparel. The company’s continued improving operating performance in the golf equipment business has enabled it to aggressively expand its Topgolf entertainment business to boost growth while keeping financial leverage from increasing. However, the rapid expansion of Topgolf entertainment venues brings with it the potential for high future business execution risk given the Topgolf business is capital-intensive, cyclical, and discretionary. There also remains some risk that spending on golf equipment and entertainment may recede over the next year as inflationary pressure continues to challenge consumers and demand for golf equipment moderates from high levels reached during the pandemic.
“Moody’s expects Topgolf Callaway’s revenue to remain stable over the next 12-18 months with modest revenue growth of about 2 percent to 3 percent as lower demand for golfing equipment and apparel is more than offset by growth in the restaurant entertainment segment as the company continues to add more locations at a cadence of about 11 venues per year. Moody’s expects that the company will be able to navigate through the weaker recessionary environment over the next 12-to-18 months and continue to successfully expand TGI locations to drive growth. Moody’s further expects financial leverage will remain high starting at 5.9x debt-to-EBITDA as of December 31, 2022 (proforma for the transaction) and then moderating to below 5.0x debt-to-EBITDA over the next 12-18 months. However, the potential for future execution challenges with its TGI expansion strategy or waning demand or increased competition for its highly discretionary categories could derail its ability to deleverage. If the company cannot improve its EBITDA, leverage could increase as the company continues to invest in new TGI venues. Moody’s expects that Topgolf Callaway can curtail new investment at TGI and preserve free cash flow if operating conditions turn negative. Further, Moody’s expects TGI will not utilize funding from the golf equipment/apparel business by the end of 2023. TGI will nevertheless remain heavily reliant on external cash sources from lease-type structures such as REITs including upfront funding advances during construction to help with new venue builds. This is likely to result in rising lease liabilities that outstrip the consolidated company’s free cash flow and leads to rising debt.
“Moody’s expects liquidity to remain good as reflected in the SGL-2 rating with cash on hand of $265 million as of December 31, 2022 pro forma for the proposed refinancing, and $525 million of availability of its ABL facility following its contemplated refinancing. These cash sources along with operating cash flow and leases should provide ample funding for the sizable capital spending. Moody’s anticipates that the company will only opt to begin construction on new Top Golf venues once some lease funding is in place, which alleviates some of the reliance on the company’s internal cash sources and the revolver.”
