Moody’s Investors Service lowered the debt rating of Outerstuff LLC, the supplier of branded youth apparel for the major sports leagues. The downgrades reflect Outerstuff’s missed term loan principal and interest payments that were due March 28 2020, and it entering into a forbearance agreement with term loan lenders on April 6, 2020.

Moody’s said the limited default “LD” designation appended to Outerstuff’s PDR reflects that the missed payments constitute a default under Moody’s definition, despite entering into a forbearance agreement. The limited default designation will remain until the company resolves the missed payments. Concurrently, the rating on the company’s senior secured term loan due July 2021 was downgraded to Ca from Caa3. The rating outlook remains negative.

The rating agency said, “Outerstuff needs to substantially improve performance in 2020 in order to address looming debt maturities in April and July 2021, which may prove challenging given the unprecedented challenges in the face of the coronavirus pandemic. With 2019 having been a transitional year for the company, revenue and EBITDA growth were expected to resume growth in 2020 prior to the onset of coronavirus, supported by new license contracts with partners such as Fanatics, the summer Olympics, and growing eSports offerings, among others. Profit margins and cash flow were also expected to benefit from increased sales of higher-margin licensed businesses, reduced inventory liquidation activities, and strategic realignment and cost reduction initiatives.”

Downgrades

  • Corporate Family Rating, Downgraded to Ca from Caa2
  • Probability of Default Rating, Downgraded to Ca-PD/LD from Caa2-PD
  • Senior Secured Bank Credit Facility, Downgraded to Ca (LGD4) from Caa3 (LGD4)

Outlook Actions

  • Outlook remains Negative

Rating Rationale
Moody’s wrote, “The Ca CFR reflects Outerstuff’s high likelihood of default due to the missed term loan payments and subsequent forbearance agreement with lenders. Outerstuff’s credit metrics are very weak and its capital structure is unsustainable at current levels of performance. Liquidity is weak, reflecting the company’s need to address looming debt maturities in April and July 2021. The rating also reflects the company’s small revenue scale, narrow product concentration primarily in licensed children’s sports apparel in North America and a nascent adult and international presence, and reliance on licensing arrangements from several sports leagues for a significant majority of revenue. Also considered is private equity ownership given joint control by management and the private equity sponsor. Ratings are supported by the company’s diversification across retail channels, its entrenched market position related to exclusive license contracts with the NFL, NBA, NHL, MLB, MLS, and the USA Olympics, which allow it to sell virtually all children’s apparel with the teams’ logos, and Moody’s view that the children’s licensed sports apparel market is relatively stable and recession-resistant because of its low fashion risk, natural replenishment cycle and consumers’ steady interest in team sports. However, as sporting events remain canceled due to COVID-19, demand is likely to be negatively impacted as a result.

“The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The non-food retail sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Outerstuff’s credit profile, including its exposure to widespread store closures and US discretionary consumer spending have left it vulnerable to these unprecedented operating conditions. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.”

Factors That Could Lead To An Upgrade Or Downgrade Of The Ratings
Ratings could be downgraded if the company defaults on other elements of its capital structure, pursues a formal reorganization under the U.S. Bankruptcy Code, or if Moody’s comes to expect the recovery value on Outerstuff’s term loan to be lower than currently estimated.

An upgrade would require the company to significantly reduce debt to more sustainable levels while improving its overall operating performance and liquidity, such as sustained positive free cash flow, maintaining ample excess revolver availability, and extending its debt maturity profile.

Outerstuff generates the majority of its revenues from products sold under exclusive licenses with the NFL, NBA, NHL, MLB, MLS, U.S.A. Olympics, Umbro as well as licenses with over 200 NCAA colleges and universities, and sells to team shops, specialty sports chain stores, department stores, and mass merchants mainly in the United States. Since the May 2014 investment by Blackstone, the private equity sponsor and management have equal equity stakes of approximately 50 percent and share control of the company.

Photo courtesy Outerstuff