The debt rating for Pelican Products, a supplier of performance case solutions and advanced portable lighting systems based in Torrance, CA, was affirmed by Moody’s but the rating agency’s outlook was changed to negative.

Moody’s said the ratings reflect Pelican’s exposure to cyclical industrial and consumer end markets, its modest scale in a fragmented and highly competitive landscape, and high financial leverage for its business risk. Moody’s estimates debt/EBITDA in the high 6x range (after Moody’s standard adjustments), pro forma for $20 million drawn on the company’s revolver in March 2020. Less than $10 million of the revolver remains available. Moody’s said the company is susceptible to commodity price volatility, including for resins, steel and aluminum, and exposed to potential supply chain disruptions as a result of the pandemic. This could lead to higher input costs. With about 40 percent of non-U.S. sales and U.S. dollar-based reporting and denominated debt, Pelican faces foreign exchange headwinds.

Moody’s said it expects these factors to weigh on the company’s earnings through 2021, with adjusted EBITDA margins tightening towards the mid-teens range. Moody’s notes that despite revenue growth in recent years, operating earnings have remained relatively flat in the face of competitive pricing pressure and ongoing investments to support growth. Pelican’s net revenues were approximately $432 million as of the last twelve months ended September 30, 2019.

Moody’s said Pelican offers products with well-recognized brands for its quality protective cases and has focused on product diversification and investments in innovation to enhance its competitiveness. The company should benefit from increased demand for biothermal products (25 percent to 30 percent of revenue) to the healthcare industry, driven by the pandemic. This should provide some offset to the meaningful pressure on weakening industrial and consumer markets. Along with cost reduction measures, the favorable trend in biothermal products should ease some margin pressure.

Moody’s said liquidity is currently adequate, with unrestricted cash of about $42 million, less than $10 million of revolver availability and no meaningful debt maturities. Moody’s expects modest positive free cash flow in the near term.

The negative outlook reflects Moody’s expectation of deteriorating end-market and macroeconomic conditions, heightened by the coronavirus pandemic, and limited availability on the revolver. This leaves little cushion to absorb unforeseen circumstances, given deepening recessionary conditions and continued uncertainty as to the timing and potential magnitude of the effect on the company’s markets.

In terms of corporate governance, event risk is increased with private equity ownership.

Affirmations

  • Corporate Family Rating, Affirmed B3
  • Probability of Default Rating, Affirmed B3-PD
  • Senior Secured 1st Lien Bank Credit Facility, Affirmed B2 (LGD3)
  • Senior Secured 2nd Lien Bank Credit Facility, Affirmed Caa2 (LGD6, from LGD5)

Outlook Actions

  • Outlook, Changed To Negative From Stable

Factors That Would Lead To An Upgrade Or Downgrade Of The Rating
A rating upgrade is unlikely until operating conditions improve along with the broad macroeconomic environment. Over time, the ratings could be upgraded if the company were to grow its scale while improving margins meaningfully from current levels and apply free cash flow to debt reduction. This would result in debt-to-EBITDA in the low 5x range and free cash flow-to-debt sustained in the high-single digits, accompanied by the maintenance of a good liquidity profile, including a greater revolver size and availability.

Ratings could be downgraded if Moody’s expects material weakening in sales or margins, EBITA-to-interest below 1.5x or debt/EBITDA to be sustained above 6.25x. As well, a meaningful decline in the cash balance, diminishing revolver availability, or weaker than expected free cash flow could also lead to a rating downgrade, as could weakening of financial reporting. Debt financed acquisitions or shareholder returns that increase leverage would also drive downward rating pressure.

Photo courtesy Pelican Products