Moody’s Investors Service downgraded the corporate family rating (CFR) and senior secured first lien term loan rating for Toms Shoes, LLC , each to Caa3 from Caa2. The company’s Caa2-PD probability of default rating (PDR) was affirmed. The ratings outlook is negative.
The downgrades reflect Moody’s estimate of a below-average family recovery rate in a potential event-of-default scenario as a result of the company’s weak earnings performance. The affirmation of the PDR incorporates the interim liquidity support provided by the recent $18 million cash infusion from the company’s shareholders. The cash infusion was used to support Toms working capital needs in the third quarter of 2017.
Moody’s took the following rating actions for Toms Shoes, LLC:
- Corporate Family Rating, downgraded to Caa3 from Caa2
- Probability of Default Rating, affirmed Caa2-PD
- $306.5 million ($299 million outstanding) Senior Secured Term Loan due 2020, downgraded to Caa3 (LGD5) from Caa2 (LGD4)
- Outlook, changed to negative from stable
The Caa3 CFR reflects Moody’s view that Toms capital structure is unsustainable at present and the probability of deleveraging to a sustainable capital structure in a challenging apparel retail environment remains low. In addition, Moody’s believes that recovery rates are below average. The rating also reflects Moody’s expectations that Toms will have a weak liquidity profile in the next 12-18 months, including negative free cash flow and limited revolver availability during peak periods. However, the recent cash infusion and lack of near-term maturities provides temporary liquidity support. The rating also incorporates Toms’ small scale, high fashion risk and limited revenue diversification compared to the majority of rated apparel peers, with about half of revenue derived from the alpargata line.
The rating benefits from the $18 million shareholder cash infusion to support liquidity and enable investment in marketing. The rating incorporates the ongoing appeal of Toms successful philanthropic-based “one-for-one” product giveaway commitment, growth outside alpargata shoes and channel diversification, including a sizeable ecommerce segment.
The negative outlook reflects the heightened risk of default if liquidity or operating performance deteriorate further in the next 12-18 months.
The ratings could be downgraded if liquidity deteriorates for any reason, or if the probability of default rises.
The ratings could be upgraded if Toms improves its overall liquidity profile, including expectations for substantially reduced revolver reliance. An upgrade would also require revenue, EBITDA and cash flow improvement.
Toms Shoes, LLC is a designer, retailer and wholesaler primarily of footwear under the Toms brand. Toms’ commitment to donating one free product for each one sold is a cornerstone of its business strategy. The company’s products are sold globally in the wholesale channel and directly to consumers primarily through ecommerce. Net sales for the twelve months ended September 30, 2017 were about $354 million. The company was founded by Blake Mycoskie in 2006, and Bain Capital acquired a 50 percent ownership stake in October 2014.