Moody’s Investors Service assigned a Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating to Callaway Golf Company. Moody’s also assigned a Ba3 rating to a proposed $480 million senior secured term loan B and an SGL-2 speculative grade liquidity rating. The rating outlook is stable.
“Proceeds from the term loan will be used to fund the acquisition of Jack Wolfskin by Callaway,” said Kevin Cassidy, senior credit officer at Moody’s Investors Service. Callaway expects the transaction to close in Q1 2019.
Callaway manufactures and sells golf clubs, golf balls, and golf and lifestyle apparel and accessories under the Callaway Golf, Odyssey, OGIO and Travis Mathew brands worldwide. Jack Wolfskin is an international, outdoor apparel, footwear and equipment brand.
Ratings assigned:
Corporate Family Rating at Ba3;
Probability of Default Rating at Ba3-PD;
$480 million senior secured term loan due 2025 at Ba3 (LGD 4);
Speculative Grade Liquidity Rating at SGL-2;
The outlook on all ratings is stable.
RATINGS RATIONALE
Callaway’s Ba3 CFR reflects its concentration in a niche, highly discretionary consumer product segment. Callaway’s ratings are also constrained by the risks associated with its expansion into non-golf-related apparel products, in an industry with very different competitive dynamics than its traditional golf business. Callaway will also face integration risks with the Jack Wolfskin acquisition, a company that had been in financial distress in the recent past. Callaway’s inexperience with operating with financial leverage also constrains its rating. Callaway’s ratings are supported by its leading market position and strong brand name in the golf industry. The rating also reflects Callaway’s modest financial leverage at around 3.0 times debt/EBITDA and solid scale with pro forma revenue around $1.6 billion. The resiliency of the golf industry during economic downturns is also factored into the rating.
The SGL-2 rating reflects Moody’s expectation that Callaway will operate with good liquidity over the next 12-18 months. This reflects the rating agency’s view that the company will be able to fund all of its basic obligations through internally generated cash and cash on hand. Callaway intends to upsize its ABL revolver to $400 million. The ABL expires in November 2022.
The Ba3 rating on the secured term loan is the same as the Ba3 CFR as it represents the preponderance of debt in the capital structure. The term loan benefits from upstream guarantees from operating subsidiaries.
The stable outlook reflects Moody’s expectation that demand for the company’s golf products will remain stable, while acknowledging that there may be some volatility in its apparel business. In its outlook, Moody’s also assumes that Callaway’s financial leverage will remain below 3 times.
Ratings could be downgraded if Callaway’s operating performance weakens or liquidity deteriorates. Failure to integrate the Jack Wolfskin acquisition or difficulty executing its growth strategy in apparel could also lead to a downgrade. The rating could also be lowered if the company adopts a more aggressive financial policy with respect to debt-financed shareholder returns.
An upgrade would require a meaningful improvement in size and product diversification. The company would also need to demonstrate success in the competitive outdoor apparel industry before Moody’s would consider an upgrade.
The principal methodology used in these ratings was Consumer Durables Industry published in April 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Callaway Golf Company manufactures and sells golf clubs, golf balls, and golf and lifestyle apparel and accessories under the Callaway Golf, Odyssey, OGIO and Travis Mathew brands worldwide. Jack Wolfskin is an international, outdoor apparel, footwear and equipment brand. Pro forma revenue approximates $1.6 billion.
