Standard & Poors lowered its debt rating on Pure Fishing to CCC+ from B- as it believes a weak economic and retail outlook in 2020 might cause Pure Fishing’s lease-adjusted debt to EBITDA to be above 10x before improving to below 10x in 2021.
The rating agency said its recovery rating on the secured debt remains ‘3’, but its rounded estimate of recovery has been lowered to 50 percent from 65 percent under the assumption that the company will have drawn all of its priority asset-based lending (ABL) revolving credit facility in a hypothetical default scenario.
The negative outlook reflects the possibility that the company’s liquidity could become less than adequate to cover its fixed charges if Pure Fishing’s revenue and cash flow underperform its base case.
S&P said in a statement, “The downgrade of Pure Fishing to ‘CCC+’ reflects our expectation that leverage could be very high at about 10x through 2021 and that the company will likely generate negative operating cash flow in 2020. Our base case assumption incorporates a revenue decline in the company’s typically strong second quarter of 2020 in the mid-20% area, followed by flat year-over-year revenue in the third and fourth quarters of 2020 compared with 2019. We believe that, in line with many other manufacturers and companies affected by the COVID-19 pandemic, Pure Fishing has reduced its growth capital expenditure (CAPEX), furloughed and laid off employees, and materially reduced its cost structure in order to reduce the impact of lower revenue on EBITDA generation. Depending upon the success of the company’s existing cost improvement plan, we believe the EBITDA margin might deteriorate modestly in 2020, with a moderate improvement in 2021. As a result, we expect the company to sustain leverage above 10x in 2020, improving to the 9x-10x range in 2021. It is also our expectation that the company will maintain an EBITDA to cash interest coverage ratio in the low-1x area in 2020 and mid-1x area in 2021. While leverage will likely remain elevated through 2021, we believe the company’s liquidity is adequate over the next 12 months and that a near-term conventional payment default is unlikely under our current base case. Although the company currently expects no significant increase in bad debt expense this year, it has also granted payment extensions to some of its customers. If retailer collections are weakened in the remainder of 2020 by an anticipated steep recession, this could potentially stress Pure Fishing’s liquidity if write-offs become material.
We anticipate retail closures and supply chain disruptions as a result of the COVID-19 pandemic will cause significant uncertainty and put stress on the company’s revenue and cash flow. We believe that closures of “non-essential” retailers in the U.S., Europe, and Asia have affected the sales of Pure Fishing’s products and delays in receivables collections might further weaken the company’s cash flow in 2020. As a result, we expect working capital to be a use of liquidity in 2020, as slowed inventory turns coupled with delayed collections result in a net use of the company’s cash and reliance in 2020 on its $125 million ABL revolver, which had a $100.6 million balance at the end of March 2020. We expect the company to continue to generate negative operating cash flow through the end of 2020. In addition, closures of the company’s manufacturing facilities and distribution centers will create additional stress on the company’s ability to fulfill orders, which could potentially result in lost or delayed sales through at least the end of the second quarter of 2020.
“The anticipated steep recession, combined with a difficult operating environment for retailers, has left the company little room for operating missteps. While sales of the company’s products have a track record of resilience during economic downturns, sales declines in 2019 as a result of customer inventory consolidation and execution missteps during the transition from ownership under Newell to Sycamore Partners resulted in lease-adjusted leverage above 10x in 2019. We believe that the company has taken steps to remedy many of these operating issues, but the impact of the COVID-19 pandemic on the company’s cash flow will probably result in elevated leverage through 2021. As a result, we believe the company is now reliant on favorable business and economic conditions in order to complete its transformation plan, and any additional risk factor, operating misstep, or worsening of anticipated retailer collections, could hurt liquidity. Partially offsetting these risks is that fishing is a low-cost entertainment option that consumers are likely to view as compatible with social distancing, which might shield the company from a significant sales decline in 2020 that many other leisure manufacturers are facing.”
S&P said the ratings could be lowered if EBITDA, cash flow, and liquidity continued to weaken, or it believed the company was likely to complete a distressed exchange or restructuring in the near term. The outlook could be revised to stable or rating raised if EBITDA, cash flow, and liquidity improved in a manner that reduced leverage below 8x, and the company was able to generate sustainably positive cash flow from operations.
Pure Fishing is a global provider of fishing tackle, lures, rods, and reels with a portfolio of brands that includes Abu Garcia, All Star, Berkley, Chub, Fenwick, Greys, Hardy, Hodgman, Johnson, JRC, Mitchell, Penn, Pflueger, Sebile, Shakespeare, SpiderWire, Stren, and Ugly Stik
