Moody’s Investors Service placed the ratings of Vista Outdoor, Inc. under review for downgrade following its announcement on May 5 that it plans to separate its Outdoor Products and Sporting Products segments into two independent, publicly-traded companies.
Specifically, Vista plans to pursue a tax-free spin-off of its Outdoor Products segment into an independent company owned by the existing shareholders of Vista.
Moody’s said the proposed spin-off is credit negative for existing debt holders as approximately 25 percent of EBITDA will be divested with the spin-off and the company will have less scale and product diversity, as well as more cyclicality as a pure player ammunition business.
Prior to the spinoff, Vista plans to continue to pursue acquisitions in the Outdoor Products segment; however, after the spinoff, Vista plans to focus more on shareholder-friendly activities such as dividends and opportunistic share repurchases with a long-term total leverage target not to exceed 3.0x, which is an increase from the company’s current 1.0x to 2.0x net leverage target. The spin-off is expected to be completed during the calendar year 2023.
In the review, Moody’s said it will assess the strategic operating focus of management, including the trajectory of Vista’s performance in earnings for the remaining sporting products, the increase in the cyclicality of the remaining business following the reduced scale and diversity through the spin-off of Outdoor Products and the company’s new capital structure and free cash flow generation ability including the assets supporting the company’s existing debt.
Moody’s believes an increase in leverage and introduction of a dividend in the context of weakening the asset base and increasing business volatility represents a more aggressive financial policy that increases governance risk. Vista’s ESG scores (currently CIS-3, E-3, S-4 and G-3) will also be reassessed in the review and are likely to weaken as it becomes more focused on the ammunition business. The higher cyclicality in the remaining business could further constrict free cash flows at times when ammunition sales experience a cyclical downturn.
Moody’s wrote, “Vista’s existing credit profile (Ba3 CFR) reflects its leading position as one of the largest ammunition manufacturers in the U.S., its leading brands in multiple niche outdoor product categories and favorable U.S. outdoor activity participation trends. The rating also reflects Vista’s conservative 1.0x-2.0x net debt-to-EBITDA target and healthy free cash flow throughout ammunition industry cycles aided by not paying a dividend. Vista’s debt to EBITDA leverage of 1.3x as of December 26, 2021, is currently low in part because of the current strength of the highly cyclical ammunition market. This level is lower than previous downturns because of the stronger ammunition market position following industry tailwinds and the Remington acquisition, cost reductions and incremental earnings from acquisitions funded with existing cash and free cash flow. Vista’s credit profile is constrained by the volatility in non-law-enforcement-related ammunition demand, difficulties sustaining organic revenue growth in the competitive outdoor products market, and high social risks related to the sale of its ammunition products.
“Moody’s believes social risk will remain highly negative for Vista due to its participation in the gun ammunition industry, and will likely increase after the spinoff given that Vista will become a pure-play ammunition company. The high social risk results in a lower rating and a need for stronger credit metrics than comparably rated companies than it would in the absence of the social risk.
“Moody’s expects governance risk to increase as a result of the spin-off of the outdoor segment because Vista plans to pursue shareholder-friendly actions including dividends and share repurchases while targeting leverage at a higher level over time of up to 3.0x debt to EBITDA compared to the current 1.0x to 2.0x net leverage target (0.9x as of March 31, 2022, based on Vista’s calculation).
“Vista’s SGL-1 rating reflects $23 million of cash and more than $200 million of projected free cash flow over the next 12 months, and a good maturity profile with the $450 million asset-based revolver expiring in 2026 and the $500 million of notes due in 2029.”
Photo courtesy Moody’s