S&P Global Ratings said that as a result of strong performance and the tightened financial policy, it revised its outlook on RV Retailer to positive from stable.
The revised outlook comes as RV Retailer, through its borrower subsidiary RVR Dealership Holdings LLC (OpCo), seeks to raise an incremental term Loan B of $180 million and expand the capacity of its mortgage facility to as much as $200 million to finance a pipeline of dealership acquisitions in 2021 and add liquidity for future acquisitions.
The company also revised its financial policy to 3x maximum gross leverage tolerance at the OpCo level, which is lower than the 3.5x previously.
S&P affirmed all ratings, including the ‘B’ issuer credit rating and ‘B+’ issue-level rating on the upsized term loan, and assigned its ‘B+’ issue-level rating and ‘2’ recovery rating to the proposed $40 million delayed-draw term loan commitment.
The positive outlook reflects the possibility of an upgrade if RV Retailer in the coming quarters can execute its acquisition pipeline and manage potential integration risks by approximately doubling its dealership footprint in 2021 while maintaining consolidated pro forma gross debt to EBITDA below 5x even incorporating an economic sensitivity analysis.
S&P wrote in its analysis, “Despite the proposed debt issuance, we revised the outlook to positive due to ongoing operating outperformance compared to our previous expectations, as well as RV Retailer’s updated financial policy, which indicates a lower tolerance for financial risk. Our updated forecast is for consolidated pro forma adjusted debt to EBITDA to be in the low-2x area in 2021, incorporating robust retail demand for RVs, the proposed debt issuance, debt at RV Retailer Intermediate Real Estate Holdings LLC (PropCo), and EBITDA from the company’s acquisition pipeline during the remainder of this year. We do not net cash in our leverage measure because of high anticipated RV sector volatility over the economic cycle, although we expect RV Retailer will carry adequate cash balances at least over the next 1-to-2 years even incorporating its acquisition plan.
“The RV industry continues to experience elevated retail demand because consumers perceive RVs as a safe and attractive way to spend leisure time outdoors, resulting in RV Retailer’s organic revenue growth of 46 percent in the first half of 2021. According to the RV Industry Association, a trade organization that represents original equipment manufacturers (OEMs), industry shipments will likely increase 33.8 percent in 2021. Publicly traded OEMs have reported significant year-over-year increases in the backlog. While backlogs are an imperfect indicator and subject to cancellation by dealers at any time without penalty, they increase our confidence in our 2021 assumptions. The inventory orders reflect dealers’ gauge on consumer sentiment and the perception that RV travel provides an attractive value proposition while competing for travel options continue to recover. We increasingly believe good demand might continue into 2022 because the COVID-19 pandemic may have a more lasting effect on consumers’ desire for outdoor recreation. We believe consumers’ demand cannot be fully satisfied in 2021 based on the currently lean inventory levels.
“Good anticipated retail demand over the next several quarters may alleviate integration risks during a period when RV Retailer’s acquisitions are very aggressive. RV Retailer’s footprint, currently 58 locations across 17 states, continues to grow rapidly and will likely reach 75-to-80 by the end of 2021. The company has a robust pipeline of acquisitions that will be funded primarily with debt, including the proposed term loan upsize and mortgage facility, which will likely be expanded to as much as $200 million of capacity. We expect acquisitions to continue in 2022 and beyond.
“We also revised the outlook because we understand controlling owner Redwood Capital Investments has updated its financial policy to maximum gross leverage tolerance of 3x at OpCo level. This is a lower leverage tolerance than the 3.5x described in our January 14, 2021, publication. The new 3x tolerance translates into our S&P Global Ratings-adjusted and consolidated measure of about 3.5x, mostly because we consolidate mortgage debt at PropCo. We believe the company would support its property subsidiaries, indicated by OpCo’s lease payment to PropCo to service the mortgage debt, and that business operations depend on the real estate assets. We believe RV Retailer has reduced its maximum leverage tolerance because its footprint has already grown substantially and can continue to expand using less leverage.”
Photo courtesy RV Retailer