S&P Raises Authentic Brands Debt Ratings on Improved Performance

S&P Global Ratings raised the debt rating of Authentic Brands Group, LLC (ABG) after the company outperformed its previous forecast for its sizable 2022 acquisition of Reebok and recently-closed acquisition of Boardriders, Inc. S&P said ABG funded the Boardriders acquisition with less debt than previously expected due to new equity from its financial sponsors.

S&P said ABG also repaid $300 million in debt over the past 12 months and now expects pro-forma leverage to improve to the low-4x area in 2023, compared with its previous expectation in the mid-4x area. As a result, S&P raised its issuer credit rating on ABG to ‘B+’ from ‘B’. Concurrently, it raised its issue-level ratings on the company’s first-lien senior secured debt to ‘BB-‘ from ‘B’ and revised the recovery rating to ‘2’ from ‘3’. The ‘2’ recovery rating indicates S&P’s expectation for substantial (70 percent-90 percent; rounded estimate: 75 percent) recovery in the event of a default.

S&P also raised its issue-level ratings on the company’s second-lien senior secured debt to ‘B-‘ from ‘CCC+’. The ‘6’ recovery rating is unchanged and indicates its expectation for negligible (0 percent-100 percent; rounded estimate: 0 percent) recovery in the event of a default.

The stable outlook reflects S&P’s expectation that ABG will show a consistent operating performance, demonstrated by margins in the high 70 percent area and leverage in the low-4x area, with the potential to increase close to 5x over the next 12 months as it continues to integrate its acquisitions.

S&P said in its analysis, “Compared with our original expectations of leverage in the mid-4x area for fiscal 2023, we now expect leverage will improve to the low-4x area for the year, pro forma for recent acquisitions and debt reduction. ABG’s leverage has improved to below 5x in recent periods, in part due to good EBITDA growth and from the company’s recent $300 million paydown of its second-lien term loan, as well as a more disciplined approach in using debt to fund acquisitions. The company funded its acquisitions of Rockport, Vince, and Hunter Boots in 2023 with cash, and we expect the EBITDA contribution from these acquisitions will modestly de-lever the business over the rest of 2023 and into 2024. In addition, ABG used less debt than originally anticipated for the Boardriders transaction by partially funding the acquisition with recent add-on equity contributions from its financial sponsors. Absent further large solely debt-funded acquisitions or shareholder returns, we expect ABG’s leverage will remain below 5x. However, we acknowledge there is risk that the company could re-lever above 5x given its aggressive growth strategy.

“Operating performance and profitability have been strong through the first half of 2023 as margins remain high, with Reebok outperforming original expectations.

“ABG’s performance has been bolstered by the successful integration of Reebok, which remains the company’s largest acquisition to date. The initial carve-out of the brand from Adidas is largely finished, with ABG continuing to expand the brand into new markets and verticals, and recently completing its final carve-out stage through the signing of long-term agreements and launching of wholesale operations with regional partners in Europe. We believe these initiatives and performance through the first half of 2023 will allow for Reebok royalties to be approximately 20 percent higher than our original expectations for the brand. We expect margins will be in the high-70 percent area for the remainder of 2023, as operating performance remains consistent and ABG continues to execute on its acquisition-based growth strategy. In addition, we continue to expect ABG to generate a discretionary cash flow of at least $400 million in fiscal years 2023 and 2024, absent potential sizable shareholder distributions.

“ABG’s licensing model earns guaranteed minimum royalties for the use of the company’s brands, thereby providing a stable and predictable stream of recurring revenue through multiyear contracts. Moreover, since the licensee is responsible for the design, manufacturing, logistics, and working capital management, the company can maintain a very lean cost structure, allowing ABG to generate discretionary cash flow (free cash flow after tax distributions) of more than $200 million as of last 12 months ended June 30, 2023, with S&P Global Ratings-adjusted EBITDA margins increasing to almost 80 percent from the mid-70 percent area in the same period in the previous year.

“The company’s recent acquisitions and partnerships on top of closing Boardriders further reinforce ABG’s quickly growing scale, as the pace and size of acquisitions have increased over the past two years.

“ABG has an established track record of integrating acquisitions, as demonstrated by its ability to increase annual revenue to more than $1 billion in six years by licensing out brands that were previously mismanaged or under financial duress. The company’s revenue base has grown significantly over the past two years, exhibiting over 40 percent growth each year in 2021 and 2022 because of the increased pace and size of the acquisitions during that time. Before 2021, the company’s annual acquisition spending was $300 million, which was modestly lower than in 2018, when it made six acquisitions, including the remainder of Aeropostale, Nine West, and Nautica. The $1.203 billion Boardriders transaction was the company’s second-largest acquisition to date in terms of purchase price and comes shortly after it acquired Reebok in early 2022. ABG has also completed more than $200 million in other acquisitions in 2023, including footwear brands Hunter Boots and Rockport. In May 2023, ABG also entered a partnership and long-term license agreement with luxury brand Vince after acquiring its intellectual property (IP) for $76.5 million. Under the partnership, Vince’s IP has transferred to ABG Vince, a newly formed subsidiary that will be 75 percent owned by ABG, with Vince retaining the remaining 25 percent minority stake. We expect that pro forma for these acquisitions, ABG’s revenue will increase to $1.4 billion – $1.5 billion by the end of 2023, and its portfolio now consists of more than 50 brands in more than than 150 countries, with over $29 billion in global annual retail sales. This quick, substantial growth in the company’s brand portfolio and partner network reflects ABG’s expertise in brand management and marketing strength, which we view positively.

“In August 2023, ABG’s SPARC Group, a joint venture that includes ABG and Simon Property Group (A-/Stable/–), also entered into a new strategic partnership with SHEIN, a global online marketplace for fashion, beauty, and lifestyle products. Under the agreement, SHEIN acquired a one-third interest in SPARC and SPARC became a minority shareholder in SHEIN. Although we do not expect the partnership to materialize into additional revenue or EBITDA contribution for ABG at the offset, we believe the agreement will expand SPARC’s distribution base by leveraging SHEIN’s existing e-commerce platform. This should, in turn, allow ABG to continue expanding its common equity interests in the venture and has the potential to provide future revenue and EBITDA earnings from further licensing agreements.

“The stable outlook reflects our expectation that ABG will exhibit consistent operating performance, as demonstrated by margins in the high-70 percent area and leverage sustained below 5x over the next 12 months as it continues to successfully integrate acquisitions.”

ABG’s brand portfolio includes Marilyn Monroe, Elvis Presley, Muhammad Ali, Shaquille O’Neal, David Beckham, Dr. J, Greg Norman, Neil Lane, Thalia, Sports Illustrated, Reebok, Brooks Brothers, Barneys New York, Judith Leiber, Ted Baker, Hunter, Vince, Hervé Léger, Hickey Freeman, Frye, Nautica, Juicy Couture, Vince Camuto, Lucky Brand, Aéropostale, Forever 21, Nine West, Eddie Bauer, Boardriders, Spyder, Volcom, Shark, Tretorn, Prince, Airwalk, Izod, Jones New York, Van Heusen, Hart Schaffner Marx, Arrow and Thomasville.