S&P Global revised its issuer credit rating on Pure Fishing from the SD (selective default) rating given earlier last week, after the company’s sponsor, Sycamore Partners Management, bought up some of its debt at a significant discount to face value.
S&P said Sycamore repurchased the company’s entire $255 million second-lien term loan (not rated). The debt rating agency further said it believes Sycamore repurchased about a quarter of Pure Fishing’s first-lien term loan at a deep discount to face value through a series of open-market transactions over the past several months.
S&P said, “We viewed these repurchases as tantamount to a default because of the company’s ongoing cash burn and need for additional liquidity this year, as well as its lenders’ receipt of less than par value without adequate offsetting compensation. We believe another restructuring or traditional default appears likely in the next 12 months absent a significant favorable change in Pure Fishing’s financial position.”
As a result, S&P raised its issuer credit rating on Pure Fishing to ‘CCC’ from ‘SD’ (selective default) and its issue-level rating on its first-lien term loan to ‘CCC’ from ‘D’. The negative outlook reflects that Pure Fishing may default or undertake another restructuring in the next 12 months and is dependent on favorable business, financial, and economic conditions to meet its financial commitments.
S&P said in its analysis, “The ‘CCC’ rating reflects Pure Fishing’s less-than-adequate liquidity, minimal fixed charge coverage, and unsustainably high leverage, which increase the likelihood of another restructuring or default in the next 12 months.The company continues to struggle because of retail customer de-stocking this year, which has negatively affected the entire industry, and we expect very weak credit metrics through 2024. We continue to view Pure Fishing’s capital structure as unsustainable because we expect very high leverage through 2024, with no room for operating missteps or unexpected headwinds. Despite our forecast for an approximate $100 million working capital benefit this year as the company clears excess inventory, we expect the company’s cash flow will be insufficient to cover its fixed charges. In addition, Pure Fishing would be unable to absorb low-probability adversities and will have limited covenant headroom under its springing asset-based lending (ABL) covenant, which increases the possibility of another restructuring or a conventional default in the next 12 months. We expect the company will burn cash through 2024, despite its attempts to ramp-up its production and improve its operations through various cost-savings measures and sales initiatives, because it remains burdened by its significant interest expense due to its sizable debt balances and predominantly floating-rate capital structure. Heightened price promotions from competitors or slower retailer re-stocking could hurt the company’s operating performance beyond our base-case assumptions, further eroding its margins and straining its liquidity.
“In our updated base case, we assume Pure Fishing’s net sales decline by the 5%-10% range in 2023 and increase by the low- to mid-single digit percent area in 2024. At this level of revenue, the company will begin to increase its reported EBITDA and likely benefit from higher flow through to cash flow. However, we believe it is unlikely that Pure Fishing will generate sufficient cash flow to support its current fixed charges in 2023 and 2024 at these revenue and EBITDA levels. Additionally, the company’s $60 million real estate-backed loan from financial-sponsor Sycamore matures in October 2024. Based on our forecast, Pure Fishing may require external financing or another restructuring to meet this obligation.
“Pure Fishing participates in a highly fragmented and competitive industry amid an evolving retail landscape and is subject to potential supply chain disruptions.The company competes with other large global fishing equipment makers, such as Daiwa, Shimano Inc., Rather Outdoors, and Rapala, while the majority of its market is controlled by regional players (with smaller product scope) and private-label brands. We assume that Pure Fishing will maintain its market share over the next several years because of its good brands and favorable consumer demographics, even though its market share could shift in 2023 depending on the magnitude of its competitors’ promotional pricing actions. The company sources the majority of its products from China and Southeast Asia, which exposes it to potential supply chain disruptions.
“The company’s portfolio of quality brands may help it retain avid customers over the long term despite its near-term liquidity risks.Too much inventory at manufacturers and too little demand at retailers led to significant revenue and cash flow volatility for Pure Fishing in 2022. Despite this, the company offers a full suite of fishing equipment products, including durables, consumables, and accessories. The company’s portfolio comprises iconic fishing brands, such as Berkley, Abu Garcia, and Shakespeare, among others. With 25 brands, Pure Fishing typically uses store-level data, weather reports, and fishery reports to inform its retailer assortments and optimize its shelf space. The company’s broad portfolio caters to consumers in multiple demographics, experience levels, and price points. Pure Fishing’s current customer base skews more toward avid anglers, which we view favorably because this will likely provide it with recurring revenue over most economic cycles. Fishing as a pastime has a track record of resilience during downturns, primarily because it is a low-cost leisure activity with an enthusiastic consumer base. Furthermore, we believe avid anglers tend to fish more during periods of reduced employment. Therefore, in a downturn, we believe Pure Fishing’s sales mix will likely shift toward its consumables segment, which benefit from higher margins and provide a recurring source of revenue.
“A significant portion of Pure Fishing’s debt is held by its financial sponsor, which may provide some optionality, though it will still face refinancing challenges in 2025.Sycamore currently owns 100% of the company’s $255 million second-lien term loan due December 2026, $60 million real estate-backed loan due October 2024, and $50 million promissory note due February 2027. In addition, it holds 25% of Pure Fishing’s $719 million first-lien term loan due December 2025. This could provide the company with the opportunity to convert some portion of the cash interest on its debt to paid-in-kind interest if it encounters a near-term liquidity crisis and needs to conserve cash. However, this would only be a short-term solution due to the high interest rates on this debt, which would likely lead to an even greater debt balance at the time of its potential refinancing. A refinancing at acceptable terms would be challenging and most likely require a significant improvement in the company’s operating performance. Sycamore could also potentially convert some or all of its debt holdings to equity if it supports a refinancing or restructuring in some form.
“The negative outlook reflects that Pure Fishing may default or undertake another restructuring in the next 12 months and is dependent on favorable business, financial, and economic conditions to meet its financial commitments.”
