The Probability of Default Rating was downgraded to B1-PD from Ba3-PD and the rating on the company’s unsecured notes was downgraded to B3 from B2. The Speculative Grade Liquidity Rating was downgraded to SGL-3 from SGL-2.
The CFR downgrade reflects Vista’s weak operating performance and deteriorating credit metrics and Moody’s view that they will remain weak for an extended period. This action concludes a review for downgrade that was initiated on November 10, 2017. The rating outlook is negative.
“A challenging retail market and weak demand for recreational firearms and accessories is pressuring revenue and margins,” said Kevin Cassidy, senior credit officer at Moody’s Investors Service. This has resulted in weak credit metrics with debt to EBITDA currently around 4.5 times. “We expect leverage to increase to 5 times through March 2018 as revenue and earnings continue to decline,” noted Cassidy. Leverage should then start to decrease and approach 4.5 times in 2019 as revenue and earnings start to improve and Vista repays debt with free cash flow. The negative look reflects the uncertainty over when gun and ammunition demand trends will stabilize and when Vista’s operating performance will improve. In the negative outlook Moody’s also considers the uncertainty over Vista’s ability to comply with leverage covenants.
The downgrade of the speculative grade liquidity rating to SGL-3 from SGL-2 reflects Moody’s expectation that Vista will have lower free cash flow than previously estimated. It also reflects Moody’s uncertainty about Vista’s ability to comply with leverage covenants in its bank credit facilities.
The B3 rating on the unsecured notes is two notches lower than the B1 CFR. This reflects their effective subordination to the unrated secured credit facilities ($592 million term loan and $400 million revolver). The notes are guaranteed by the company’s domestic operating subsidiaries.
Ratings downgraded:
- Corporate Family Rating to B1 from Ba3;
- Probability of Default Rating to B1-PD from Ba3-PD;
- $350 million unsecured notes to B3 (LGD 5) from B2 (LGD 5);
- Speculative Grade Liquidity Rating to SGL-3 from SGL-2;
The rating outlook is negative
Ratings Rationale
Vista Outdoor’s B1 Corporate Family Rating reflects its high financial leverage with debt to EBITDA expected to approach 5 times. The rating is also constrained by the company’s weak operating performance and the regulatory uncertainty surrounding the gun industry. Because of this uncertainty, Vista’s credit metrics need to be stronger than other similarly-rated consumer durable companies. The rating is also constrained by its exposure to volatile raw material prices (i.e., copper and lead). The rating is supported by Vista’s good size for its product niche with revenue around $2.4 billion. Ratings also benefit from Vista’s strong brand recognition with brands such as Federal, CamelBak, and Bell. It also benefits from an expanding base of firearm enthusiasts, and solid market share in ammunition and outdoor products.
If the company’s operating performance continues to deteriorate the rating could be lowered. Significant changes in gun regulations that reduce gun and accessory sales could also prompt a downgrade. Debt to EBITDA remaining above 5 times for a prolonged period could also result in a downgrade. Failure to comply with debt covenants would also put pressure on the rating.
An upgrade is possible if Vista can increase revenue and restore its earnings, cash flow, and credit metrics in the face of industry uncertainties. Debt to EBITDA approaching 4 times could lead Moody’s to consider an upgrade.
Vista Outdoor’s major brands include Bushnell, BLACKHAWK!, CamelBak, Savage Arms, Federal, Bell, and Giro. Revenue is approximately $2.4 billion.
