Moody's, the credit rating agency, has cut its rating on Sports Authority's debt to junk bond status and warned the chain could be less than a year away from defaulting on a $300 million loan.
The Sports Authority's Corporate Family Rating was lowered to Caa1 from B3 and Probability of Default Rating to Caa1-PD from B3-PD. Moody's also downgraded the rating on the company's $300 million senior secured term loan to Caa1 from B3. The ratings outlook is negative.
“The downgrade of the Corporate Family Rating to Caa1 reflects Sports Authority's weak liquidity stemming from the need for the company to address near-term debt maturities,” Moody's analyst Michael M. Zuccaro wrote in the note. “While maturing on November 16, 2017, the company's senior secured term loan will come due on February 2, 2016 if its subordinated notes remain outstanding on that day. In Moody's view, the term loan effectively became current on February 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. 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.
“Management continues 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.”
Moody's noted that Sports Authority's $350 million subordinated notes (not rated by Moody's) mature on May 3, 2016. The $300 million secured term loan matures on November 16, 2017, but could come due on February 2, 2016 if any subordinated notes remain outstanding on that day, or if the subordinated notes are not refinanced with an extended maturity date greater than 91 days after the term loan maturity date. The $650 million ABL (unrated by Moody's) expires on May 17, 2017.
The Caa1 rating on the senior secured term loan reflects its junior position to the $650 million ABL, which has a first lien on the company's more liquid assets. The rating is also supported by the cushion provided by more junior claims in the capital structure, including $343 million of subordinated notes.
The negative outlook reflects the company's need to show improvement in operations and improve liquidity by addressing near term debt maturities.
The ratings could be downgraded if the probability of a default increases over the very near term through the inability to refinance its debt, or should substantive progress not be made by the time the subordinated notes become current on May 3, 2015. Continued weakening in operating performance and debt protection metrics could also lead to a ratings downgrade.
The outlook could return to stable if the company addresses its near term refinancing risk while maintaining adequate liquidity. An upgrade would require maintenance of adequate liquidity via the successful refinancing of its full capital structure, as well as improved operating performance such that lease-adjusted debt/EBITDAR falls below 7 times and EBITA/interest expense is sustained above 1 times.
The Sports Authority, Inc. (“The Sports Authority”) is a full-line sporting goods retailer operating 467 stores in 41 states and Puerto Rico. Revenues approached $2.7 billion for the twelve months ended Nov. 1, 2014. The company is owned by private equity firm Leonard Green & Partners, L.P.
