Moody's Investors Service downgraded Quiksilver Inc.'s Corporate Family Rating to Caa2 from B3 and Probability of Default Rating to Caa2-PD from B3-PD. Moody's also downgraded the rating on the company's $280 million secured notes to Caa1 from B2 and $225 million unsecured notes to Ca from Caa2, as well as the rating on Boardriders, S.A. EUR 200 million senior unsecured notes to Caa2 from B3. The company's Speculative Grade Liquidity rating was lowered to SGL-4 from SGL-2. The rating outlook is stable.
The downgrade reflects Quiksilver's weak operating performance and deteriorating liquidity profile. Continued execution issues in its North American operations along with significant currency pressure have led to declining revenue and earnings that, when coupled with a high debt load, drive very weak debt protection measures and an unsustainable capital structure. Lease-adjusted debt/EBITDA exceeded 11x and EBITA/Interest was near 0.0x for the latest twelve month period ended April 30, 2015. While new management pulled the previous EBITDA guidance for fiscal 2015, it noted that it expects significant improvement to begin in the first half of 2016 due to actions being taken to improve execution and on-time deliveries as well as improved sell-through rates at wholesale customers. However, given the approaching maturities of its euro lines of credit in October 2016 and notes in December 2017, without substantial improvement in earnings over the next two years, refinancing its capital structure could be challenging. Thus, the risk of default, including the potential for a distressed exchange-type restructuring, is high.
The lowering of the company's liquidity rating to SGL-4 reflects Moody's expectation for negative free cash flow and declining cash balances over the next 12-18 months. EBITDA is insufficient to cover interest and capital expenditures, and Moody's expects only modest improvement over this timeframe. Continued working capital reductions will likely partially offset these declines. The company had $63 million of availability under its credit facilities for borrowing and letters of credit, with about $94 million drawn and $28 million of letters of credit outstanding as of April 30, 2015. However, $33 million is drawn under short term lines of credit that come due in October 2016.
The following ratings were downgraded:
..Quiksilver, Inc.:
….Corporate Family Rating to Caa2 from B3
….Probability of Default Rating to Caa2-PD from B3-PD
….Speculative Grade Liquidity to SGL-4 from SGL-2
..Quiksilver, Inc. and QS Wholesale, Inc.:
….$280 million senior secured notes due 2018 to Caa1 (LGD3) from B2 (LGD 3)
….$225 million senior unsecured notes due 2020 to Ca (LGD6) from Caa2 (LGD 6)
..Boardriders S.A:
….EUR 200 million notes due 2017 to Caa2 (LGD3) from B3 (LGD 3)
Outlook Actions:
..Issuer: Boardriders SA:
….Outlook, Changed To Stable From Negative
..Issuer: Quiksilver, Inc.:
….Outlook, Changed To Stable From Negative
RATINGS RATIONALE
Quiksilver's Caa2 Corporate Family Rating reflects the company's very high debt and leverage burden and Moody's expectation that leverage will remain high over the intermediate term given ongoing foreign exchange challenges and execution issues primarily in its North American business. Liquidity is weak, reflecting Moody's expectation for modest EBITDA improvement over the next twelve months, with continued negative free cash flow generation after cash interest and $25 million of capital expenditures, partially offset by improved working capital. Balance sheet cash is relatively modest at $55 million, including restricted cash, and will likely diminish. Committed availability under its various credit lines was also modest at $63 million as of April 30, 2015, although its short term lines come due in October 2016. Despite current operating challenges we believe the company's brands are well recognized in their categories, evidenced by the still high gross margins of the company.
The stable outlook reflects our expectation that while Quiksilver's credit metrics will remain weak, current balance sheet cash and revolver availability should be sufficient to support cash needs over the next 12 months.
Ratings could be downgraded if Quiksilver's operating performance and liquidity deteriorate, or if the company's probability of default were to increase for any reason.
A higher rating would require Quiksilver to improve its liquidity profile and operating performance such that free cash flow approached break even, EBITA/Interest improves to 1.0x, and its maturity profile is extended.
