Moody's, the credit rating agency, lowered its rating on The Sports Authority's debt deeper into junk bond status and warned the chain could be less than a year away from defaulting on a $300 million loan.
TSA’s Corporate Family Rating was lowered to Caa1 from B3 and Probability of Default Rating to Caa1-PD from B3-PD. The company's $300 million senior secured term loan was cut to Caa1 from B3. The ratings outlook is negative.
In the note, Michael Zuccaro, Moody's analyst, wrote the downgrade reflects Sports Authority's “weak liquidity stemming from the need for the company to address near-term debt maturities.”
While TSA’s senior secured term loan matures on Nov. 16, 2017, it will come due on Feb. 2, 2016 if its subordinated notes remain outstanding on that day. In Moody's view, the term loan effectively became current on Feb. 2, 2015.
“In addition, the company's operating performance and debt protection metrics remain weak, with lease-adjusted debt/EBITDAR rising to over 8.25 times and EBITA/interest falling well below 1.0 time in the latest twelve month period ended November 1, 2014,” Zuccaro wrote. “At these operating levels, Sports Authority's capital structure is unsustainable over the longer term, and the risk of a default, including a distressed exchange, is high given the upcoming maturities.”
The analyst noted that TSA continued to implement its operational improvement plan, which includes cost savings initiatives and investments in the customer shopping experience through improved product merchandising and stock levels, more strategic store remodel/relocation and marketing plans, and e-commerce initiatives. “However, when considering margin pressures stemming from a highly promotional retail environment and increased shipping costs related to higher e-commerce sales, these investments have exacerbated EBITDA declines. Should these initiatives not bear fruit over the next twelve months, refinancing its capital structure could be challenging.”
The negative outlook reflects the company's need to show improvement in operations and improve liquidity by addressing near term debt maturities. The outlook could return to stable if the company addresses its near term refinancing risk while maintaining adequate liquidity.
