Moody’s Investors Service downgraded Topgolf International, Inc.’s Corporate Family Rating (CFR) to Caa2 from B3, Probability of Default Rating (PDR) to Caa3-PD from Caa1-PD, and the first lien credit facility ratings (including a senior secured revolver and term loan) to Caa2 from B3. The outlook was changed to negative from stable.

The downgrade of Topgolf’s ratings reflects the impact of the coronavirus outbreak which has disrupted the ability to operate the company’s venues until the spread of the virus subsides. As a result, leverage levels will increase substantially and liquidity will deteriorate for as long as the locations remain closed, according to Moody’s. Even with the re-opening of the venues, operating performance may remain below normal levels due to lower consumer spending arising from weak economic conditions and ongoing social distancing behaviors. Moody’s projects Topgolf will need additional sources of liquidity to avoid a default.

Downgrades

  • Probability of Default Rating, Downgraded to Caa3-PD from Caa1-PD
  • Corporate Family Rating, Downgraded to Caa2 from B3
  • Senior Secured Bank Credit Facility, Downgraded to Caa2 (LGD3) from B3 (LGD3)

Outlook Actions

  • Outlook, Changed To Negative From Stable

Rating Rationale

Moody’s wrote, “Topgolf’s Caa2 CFR reflects its already very high leverage of 7.3x (as of Q4 2019, including Moody’s standard lease adjustments), which will increase further while the company’s liquidity deteriorates due to the impact of the coronavirus outbreak which has limited the ability to operate its facilities. In the event that the venues open for a material portion of the 2020 season, Topgolf’s customer visits are projected to be below normal levels as consumers maintain a degree of social distancing and avoid large crowds, and spend less on discretionary services due to a challenging economic environment.

“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The out of home entertainment sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Topgolf’s credit profile, including its exposure to discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Topgolf remains vulnerable to the outbreak continuing to spread. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on Topgolf of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

“A governance consideration that Moody’s considers in Topgolf’s credit profile is the company’s very aggressive financial policy given the development strategy of building and opening several new facilities. This financial strategy would require additional sources of funding beyond what is available from the $350 million term loan and $175 million revolving credit facility. The loss of cash flow from existing centers due to the pandemic will accelerate the decline in liquidity and increase the need for additional sources of funding. Topgolf has historically been able to raise additional funding to support its development plan, but an inability to raise additional funding going forward could lead to a default.

“Topgolf’s business is cyclical and will compete for discretionary consumer income with an increasing array of alternative entertainment options. The large number of pro forma add-backs to EBITDA for one-time startup costs and run-rate operating performance of new locations is also a negative. In addition, the terms of the preferred equity, which include a liquidity demand notice, elevates uncertainty in the future.

“Topgolf has expanded the number of locations across the country which increases the company’s scale and geographic diversity. The venues are high quality and typically significant in size which provides a unique experience to its guests and materially differentiates it from basic driving ranges and golf courses. While revenues generated from Topgolf’s venues account for most of its revenue, the company also has several other smaller divisions including Media, Swing Suite, Toptracer, and an international licensing division.

“The negative outlook incorporates Moody’s expectation of significant operating losses and cash usage due to the coronavirus outbreak’s impact on Topgolf’s ability to operate its venues and lower discretionary consumer spending which elevates the risk of default for Topgolf. Prolonged venue closures will erode Topgolf’s liquidity and increase leverage levels substantially. If the venues open in the near term, Moody’s expects performance will be dampened by a weak economy and the potential for consumers to maintain social distancing.

“Topgolf’s liquidity position is weak and projected to be significantly constrained in the near term due to the coronavirus outbreak. Topgolf has access to a $175 million revolving credit facility and had $37 million of cash on the balance sheet as of Q4 2019. The company raised $100 million in preferred equity in Q4 2019, but Moody’s expects negative free cash flow to continue despite efforts to reduce CAPEX and expenses due to the pandemic. As a result, Moody’s projects Topgolf will need additional sources of liquidity to avoid a default. Both the revolver and term loan are subject to a financial maintenance covenant of 5.5x over the life of the deal, and Moody’s expects the company may breach its covenant in the near term.”

Factors That Would Lead To An Upgrade Or Downgrade Of The Ratings
Moody’s said the ratings could be downgraded further due to elevated concerns about the potential for default or a distressed exchange arising from a sustained closure of Topgolf’s venues. Continuing deterioration of the company’s liquidity position or inability to obtain an amendment to its financial covenants would also lead to a downgrade.

An upgrade is unlikely as long as the coronavirus limits the ability to operate Topgolf’s venues. The ratings could be upgraded if Topgolf is able to operate its venues and obtain additional sources of liquidity to manage through the impact of the pandemic. Leverage levels maintained below 7.5x and confidence that Topgolf would remain in compliance with its covenants would also be required.

Topgolf International, Inc. currently owns and operates 57 golfing centers (54 in the US and 3 in the UK) as of yearend 2019 with 10 additional facilities under construction in the US. There is also 1 international franchise venue in Australia.

Photo courtesy Topgolf