On January 5, 2018, Boardriders’ signed a definitive agreement to acquire all of the shares of Billabong International Limited for A$1.00 per share, for a total enterprise value of A$380 million, or 7.4 times Billabong’s pro-forma FY17 earnings before interest, tax, depreciation and amortization. The transaction is expected to close in April 2018.
Proceeds from the proposed term loan, along with revolver borrowing, debt-to-equity conversions and the rollover of equity already owned by Oaktree Capital Management, L.P. (“Oaktree”), will be used to fund the acquisition, refinance certain debt facilities, pay fees and expenses, and for working capital and general corporate purposes.
Assignments:
..Issuer: Boardriders, Inc.
…. Probability of Default Rating,Assigned B3-PD
…. Corporate Family Rating, Assigned B3
…. Senior Secured Term Loan, Assigned B3(LGD3)
Outlook Actions:
..Issuer: Boardriders, Inc.
….Outlook, Assigned at Stable
All existing ratings on Boardriders’ Luxembourg-based indirect subsidiary, Boardriders SA, are unaffected and remain on review for upgrade, including its Caa1 Corporate Family Rating, Caa1-PD Probability of Default Rating and Caa1 rating on its 9.5% Senior Notes due 2020. Moody’s expects to withdraw these ratings upon completion of the acquisition.
RATINGS RATIONALE
The B3 Corporate Family Rating reflects the significant execution and integration risks associated with such a large transaction, which comes on the heels of Boardriders’ February 2016 exit from Chapter 11 bankruptcy and in the midst of operational turnaround efforts at both companies. While making significant progress on the turnaround, a meaningful amount of uncertainty remains with regards to sustainably in light of ongoing challenges in the global apparel and footwear industry. While potential acquisition synergies are significant, the costs to obtain these savings is high over the next 12-18 months and will require significant uses of cash. Despite significant debt reduction achieved as part of Boardriders’ bankruptcy process and Billabong restructuring efforts, there will remain a significant interest burden relative to low profit margins and high cost of debt. While improving, pro forma interest coverage, as measured by EBITA/interest, remains weak at around 1 time. While we expect improvement over time, this metric will remain weak over the next 12 months until synergy savings begin to materialize.
The ratings reflect the strategic benefits of the transaction, which combines the two premier companies in the global action sports apparel industry with complementary business philosophies, product offerings and geographic footprints. The combined company will benefit from larger combined scale that should drive significant cost savings over the first three years of ownership. The transaction will also strengthen Boardriders’ market position in a highly fragmented global industry and double its portfolio of well-known brand names. Boardriders has made progress implementing its turnaround strategy since emerging from bankruptcy in February 2016. Moody’s expects continued margin improvement from these efforts, and when coupled with synergies and debt reduction, will result in material de-leveraging over the next three years.
In addition, Boardriders’ liquidity is adequate, supported by Moody’s expectation that operating cash flow, balance sheet cash and excess revolver availability will amply cover cash flow needs over the next 12-18 months, including working capital, capital expenditures and sizeable cash costs to implement the integration plan. However, liquidity could become challenged if the company is not able to successfully execute its strategies and weak earnings and cash flow persist.
While Boardriders is paying a fairly high pre-synergy multiple for the transaction (about 8x Billabong’s LTM September 30, 2017 EBITDA), equity represents a material non-debt funding source in the transaction (in the form of debt to equity conversions and Billabong equity rollover). Thus pro forma leverage, as calculated by Moody’s, is moderate at around 5.0x. Given the transformative nature of this transaction, Moody’s believes that over the next several years, the company will focus on integration and operational improvement while foregoing distributions to shareholders or additional acquisitions.
The B3 rating assigned to the proposed $450 million Senior Secured Term Loan reflects the first priority interest in the company’s domestic assets, including intellectual property and trademarks, and 65% of the stock of each first-tier foreign subsidiary. The Term Loan will have a second lien position on domestic accounts receivable and inventory behind a proposed $150 million ABL facility. The Term Loan is guaranteed by each direct or indirect material domestic subsidiary. These benefits are offset by the significant portion of unsecured claims, such as accounts payable and leases, located outside of the United States, which have structural priority over the US debt on all foreign earnings and assets, potentially limiting their support to US creditors in a default scenario.
The stable outlook reflects Moody’s expectation for gradual improvement in profitability and credit metrics over the next 12-18 months, and that the company will maintain adequate liquidity as it implements its integration plan.
Ratings could be upgraded if Boardriders restores global sales growth, achieves expected synergies and profit improvement while generating positive free cash flow. An upgrade would require improving EBITA/Interest to around 1.5 times.
Ratings could be downgraded if performance or liquidity were to deteriorate due to integration-related or other operational challenges, leading to negative free cash flow or EBITA/Interest falling below 1.0x.
Boardriders, Inc. designs and distributes branded apparel, footwear, accessories, and related products under brands including Quiksilver, Roxy and DC.
