S&P Global Ratings lowered its debt ratings outlook on Boardriders Inc. reflecting its revised expectations for negative free operating cash flows (FOCF) through fiscal 2020 and the potential for a covenant violation.
S&P also affirmed its ‘B-‘ issuer credit rating on Boardriders.
Boardriders’ brands include Quiksilver, Billabong, Roxy, DC Shoes, RVCA, Element, VonZipper, and Xcel.
The rating change comes as Boardriders Inc. recently announced fiscal 2019 (ended October 31, 2019) operating results that were below expectations and believes cash flow will be negative again in fiscal 2020. The company also indicated it may not be able to comply with its total leverage covenant over the next few quarters without an action such as a covenant amendment or equity cure.
The negative outlook reflects that the rating could be lowered if the company does not successfully amend its leverage covenant to provide more cushion, or if S&P believes it will continue to generate negative free cash flow in 2021 because of unexpected incremental restructuring and growth initiatives that do not reverse recent sales declines.
S&P said, “Boardriders is likely to violate its leverage covenant unless it receives an amendment from lenders or its financial sponsor owners take an action to remain in compliance, such as an equity cure. The total leverage covenant on Boardriders’ term loan stepped down to 2.75x for the quarter ended January 31, 2020, and it steps down again to 2.5x in July 2020. We believe Boardriders’ leverage may have breached these covenant levels in January given higher revolver borrowings to fund continued cash restructuring costs, and cash outflows to resolve a cyberattack incident. Boardriders is in discussions with lenders to amend the covenants, and it noted in its annual report that its sponsors are considering taking other actions including an equity contribution sufficient to cure the anticipated covenant violation. Therefore, we do not expect the covenant issues to lead to a payment or technical default in the near term. Still, even if the company successfully receives an amendment, we believe its EBITDA cushion relative to covenant levels could be tight over the next year.
“The negative outlook reflects that we could lower the rating if the company does not successfully amend its leverage covenant to provide more cushion, or if we believe it will continue to generate negative free cash flow in 2021 because of incremental restructuring and growth initiatives that do not reverse recent sales declines.
“We could lower the rating on Boardriders if we believe the company will not generate positive free operating cash flow in 2021, potentially due to restructuring costs unexpectedly continuing, continued high working capital needs, or accelerating growth investments that do not yield anticipated results.
“We could revise the outlook back to stable if we believe the company will generate and sustain positive free operating cash flows and restore well over 10 percent cushion on its financial covenants. This should be achievable by the end of 2021, assuming the company successfully amends its covenants to permanently higher levels and meets our base-case forecast.”