Moody’s Investors Service affirmed Topgolf Callaway Brands Corp.’s debt ratings and changed its outlook on the company to stable from negative due to improving results.

The ratings affirmed include Corporate Family Rating (“CFR”) at B1 and Probability of Default Rating at B1-PD. Moody’s also affirmed the senior secured bank credit facility ratings at B1. The company’s Speculative Grade Liquidity is unchanged at SGL-2.

Moody’s said in a release, “The affirmation of Topgolf Callaway’s CFR at B1 reflects the product diversification within its three golf-related business segments, which consist of golf equipment, golf-themed restaurants and entertainment, and apparel. Topgolf Callaway’s debt structure is separate from that of its wholly owned subsidiary Topgolf International, Inc. (TGI) and there are credit benefits and risks from the TGI ownership. The company’s continued improving operating performance in the golf equipment business has enabled it to aggressively expand its Topgolf entertainment business to boost growth while keeping financial leverage from increasing. However, the rapid expansion of Topgolf entertainment venues brings with it the potential for high future business execution risk given the Topgolf business is capital-intensive, cyclical, and discretionary. There also remains some risk that spending on golf equipment and entertainment may recede over the next year as inflationary pressure continues to challenge consumers and demand for golf equipment moderates from high levels reached during the pandemic. Moody’s expects Topgolf Callaway’s revenue to decline by 0 percent-2 percent over the next 12-to-18 months as demand for golfing equipment and apparel contracts and is mostly offset by growth in the Topgolf restaurant and entertainment segment as the company continues to add more locations at a cadence of about ten venues per year.

“Moody’s believes there is event risk related to combining the debt structures of Topgolf Callaway and TGI. Debt to EBITDA on this consolidated basis (Moody’s adjusted and inclusive of Topgolf International Inc. operations and debt) is much higher at 5.4x as of September 2022 than for Topgolf Callaway on a stand-alone basis. Moody’s projects leverage on a consolidated basis to remain between 5.0x and 5.5x over the next 12-to-18 months. The company has the ability to postpone discretionary spending and preserve cash by limiting the expansion of Topgolf venues should the recession be longer and deeper than expected.

“The change in ratings outlook to stable from negative reflects Topgolf Callaway’s improvement in revenue and earnings in both the equipment and apparel businesses. Additionally, the outlook reflects improvement in TGI’s entertainment business as evidenced by recent double-digit organic sales growth across existing venues. Moody’s expects this positive momentum in TGI will lead to less cash investment needs from Topgolf Callaway to support TGI’s expansion. TGI is closer to being self-funding without having to rely on cash from Topgolf Callaway and Moody’s expects the TGI business will be free cash flow break-even in 2024. Moody’s also expects that the company will be able to navigate through the expected weaker inflationary environment while maintaining combined financial leverage at a level below 5.5x (5.4x as of the last twelve months ending September 30, 2022). The stable outlook also acknowledges that the company will be prudent with share repurchases and investment in new venues to preserve cash should the downturn impact its business more severely.

“Moody’s took no action on the ratings of Topgolf Callaway’s wholly owned subsidiary TGI including TGI’s B3 Corporate Family Rating and stable rating outlook. TGI remains highly leveraged, with negative free cash flow due to the aggressive expansion strategy, and is vulnerable to weaker demand due to the U.S. economic slowdown. TGI’s liquidity will also be pressured if it does not proactively address the February 2024 expiration of its revolver.”