S&P Global Ratings assigned a ‘B’ issuer credit rating to TaylorMade. The rating assignment come as TaylorMade Holdings Inc. announced plans to raise a seven-year, $1.05 billion senior secured term loan B to refinance debt.
It will also establish a five-year, $300 million asset-based lending (ABL) revolving credit facility.
S&P estimated adjusted debt to EBITDA at transaction close will be in the low-7x area (including preferred stock as debt) and expect the company will deleverage over the next couple of years through steady profit growth.
The rating agency also assigned its ‘B’ issuer credit rating to TaylorMade. Their outlook is stable.
S&P said in its analysis, “Our rating reflects TaylorMade’s narrow focus in the highly competitive and discretionary golf equipment industry, in which it has a strong global presence.TaylorMade is a pure-play golf equipment company that derives most of its sales from golf clubs and balls. Given the increase in golf participation over the past 18 months and favorable demographics, including the baby boom generation entering prime golfing age, we expect strong industry trends will spur healthy organic growth. The company has a global presence, generating over half of its sales outside the U.S. However, notwithstanding its solid global market position and good brand equity, the company relies on a single brand and competes against many companies with well-recognized brands including Acushnet (Titleist), Callaway, Ping, and Mizuno.
“Industry players rely on innovation and player endorsements to drive product demand and maintain their market positions. We recognize TaylorMade’s history of introducing innovative, high-quality products that have supported its solid sales growth over the last few years. This includes the release of its SIM2 driver in 2021 that we believe helped TaylorMade expand its market share in metal woods. Although we believe the company’s good track record of innovation to develop premium performance clubs is a modest barrier to entry, we do not necessarily view TaylorMade as having a distinct technological advantage over its primary competitors. We also view the category as discretionary and vulnerable to economic downturns. If consumer discretionary spending were disrupted due to a severe recession, we believe the company’s financial performance could be hurt by golfers delaying equipment purchases or trading down to lower-priced products.
“We forecast leverage will remain elevated under financial sponsor ownership. Centroid Investment Partners acquired TaylorMade in August 2021, funded with debt that this transaction will refinance. We estimate leverage at close will be in the low-7x area including preferred stock as debt (low-5x area excluding the preferred). While we expect solid profit growth will support deleveraging over the next 12-24 months, we believe adjusted debt to EBITDA will remain high. We do not view mergers and acquisitions (M&A) as core to management’s growth strategy, but we believe it will maintain an appetite for acquisitions to support its geographic expansion and in golf apparel. We forecast the company will pay cash preferred dividends of about $23 million annually. We have not incorporated dividends to common shareholders into our forecast but nevertheless view this as a possibility given financial sponsors’ focus on maximizing shareholder returns. We believe these factors will likely prevent TaylorMade from deleveraging below 5x over the next couple of years.
“TaylorMade benefits from good organic growth prospects given favorable industry dynamics and a good pipeline of innovation. Supported by consumer desire for socially distanced outdoor activities, golf participation surged after the early stages of the COVID-19 pandemic. Despite lockdowns in spring 2020 across much of the country, an influx of new players and increased golf frequency from existing players led to nearly a 14% increase in rounds played in the U.S. in 2020 (per the National Golf Foundation). This led to more golf equipment purchases and helped drive record operating performance for TaylorMade in 2020, which increased sales by over 60 percent in the second half. Despite very difficult comps, the company continued to deliver strong operating performance through 2021 (third-quarter revenue was still up about 20% year over year). We believe this is a result of participation rates remaining high, expanding popularity globally, and the company’s ability to innovate.
“We expect a moderation in rounds played as the pandemic subsides and alternative forms of entertainment become more readily available. It is less clear how this will affect the industry’s ability to retain new golfers over the long term, but we believe increased interest in the sport will drive sustained higher industry golf equipment sales compared to 2019. We further expect TaylorMade will deliver outsized growth through expansion into foreign markets, particularly Asia, and premium innovation. This includes the introduction of its Stealth Carbonwood driver in 2022, which includes a new technology platform it will incorporate into product releases for the next several years.
“We view TaylorMade’s marketing strategies as a competitive advantage. Athlete endorsements are a critical component of the marketing strategies for the top golf equipment manufacturers, serving as an additional barrier to industry entry. We believe TaylorMade has established the top collection of athlete endorsements in the industry, including Tiger Woods, Collin Morikawa, Rory McIlroy, and Dustin Johnson. The company showcases these endorsements through various social media offerings, building brand equity and attracting consumers. For example, it has a YouTube channel that features unique videos of its star athletes using its products. Its ability to leverage digital media and reach a large base of consumers has allowed the company to maintain a smaller but higher caliber pool of athlete endorsements. This has enabled it to achieve a higher return on its investment and underpins our outlook for continued expansion of EBITDA margins.
“We expect the impact from supply chain constraints and inflation will moderate but remain ongoing challenges. TaylorMade’s strong performance has overshadowed some supply chain constraints it faced in the second half of 2021, which resulted in at least $50 million in lost sales. At the same time, the company incurred higher commodity, labor, and freight costs that it largely offset with price increases, product mix, and productivity gains. Management has taken actions to improve production capacity and ensure product availability, though we assume supply availability for raw material inputs will remain tight in 2022. Although we expect the company will continue to incur higher costs next year, higher pricing (particularly as product mix shifts to premium-priced new products) and positive operating leverage from higher production volumes should offset the input cost inflation.
“The stable outlook reflects our expectation that TaylorMade will generate steady sales and profit growth, driven by healthy industry demand, good innovation, and expansion into foreign markets. This favorable operating outlook should support moderate deleveraging over the next year, including leverage near or below 6.5x.“