Moody’s Investors Service upgraded Topgolf International, Inc. following its acquisition by Callaway Golf.
Among the ratings increased were Corporate Family Rating (CFR) to B3 from Caa1, Probability of Default Rating (PDR) to Caa1-PD from Caa2-PD, and the first lien credit facility ratings (including a senior secured revolver and term loan) to B3 from Caa1. The outlook is stable. These actions conclude the review for the upgrade that was initiated on October 29, 2020.
The upgrade of Topgolf’s ratings and the stable outlook reflects the acquisition of the company by Callaway Golf Company (Callaway) which is expected to further enhance Topgolf’s liquidity position and investment flexibility, although Callaway will not guarantee Topgolf’s outstanding debt. While the pandemic has had a substantial negative impact on performance and resulted in negative EBITDA LTM Q3 20120, results are projected to improve as the economy recovers from the pandemic and as new venues are opened in 2021 and 2022. As part of the acquisition, all preferred equity will be converted to common equity. Moody’s expects Callaway will provide additional funding to continue developing new venues after the existing venues under construction are completed which will support continued growth and geographic diversification.
Moody’s said in its analysis, “Topgolf’s B3 CFR reflects the implied support by Callaway, despite the lack of a guarantee provided to Topgolf’s outstanding debt. Topgolf raised $180 million of preferred equity in 2020 to bolster liquidity and provide funding for the completion of venues currently under construction, but Callaway is expected to provide additional funding for new venues going forward. As new venues are opened, Topgolf’s scale and geographic diversity will increase further and Moody’s expects Topgolf will achieve increased sponsorship revenue after being acquired by Callaway. Topgolf’s smaller Toptracer business is also projected to benefit from faster growth due to Callaway’s worldwide business relationships. Topgolf’s locations have reopened after being closed due to the coronavirus, but are operating below normal levels and a few locations have had to close temporarily as a result of surges in the pandemic in some markets. Topgolf’s gameplay and food and beverage segment are expected to recover faster than the event business. 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. Enhanced consumer interest in golf over the past year is also projected to support Topgolf’s recovery from the pandemic. While revenue generated from Topgolf’s venues account for most of its revenue, the company also benefits from smaller business segments including Media, Swing Suite, Toptracer, and an international licensing division.
“Topgolf was substantially impacted by the coronavirus outbreak which led to negative EBITDA LTM as of Q3 2020 with over $500 million of outstanding debt in addition to operating leases and landlord financings related to its venues. While operating performance is expected to improve over the next year as health restrictions are eased and consumer spending increases, Moody’s expects some consumers will maintain social distancing and avoid crowds so a recovery to prior levels is not expected until at least 2022. Topgolf’s business will remain 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.
“A governance consideration that Moody’s considers in Topgolf’s credit profile is the expected moderation of the company’s financial policy following the acquisition by Callaway. While Topgolf will continue the development strategy of building and opening several new facilities, Callaway is projected to help fund the construction costs. As a result, Topgolf is projected to be less reliant on the ability to raise additional funding through preferred equity as the company was in the past. Although, free cash flow is projected to remain negative over the next several years given significant growth Capex on new venues.
“The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continues to disrupt economies and credit markets across sectors and regions. Moody’s analysis has considered the effect on the performance of consumer spending from the currently weak U.S. economic activity and a gradual recovery for the coming months. Although the economic recovery is underway, it is tenuous and its continuation will be closely tied to the containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
“The stable outlook incorporates Moody’s expectation of improving performance as health restrictions ease and the economy recovers from the impact of the pandemic as well as from new venue openings in 2021 and 2022. Topgolf is also expected to benefit from improved liquidity following the acquisition by Callaway and be less reliant on additional preferred equity or debt to fund venue expansion. Moody’s projects operating cash flow will turn positive in 2022 and that debt-to-EBITDA leverage levels will decline to the 6x range by the end of 2022 driven by existing and new venue growth.
“Topgolf’s liquidity position is adequate and is supported by a $175 million revolving credit facility due February 2024 with $160 million drawn and $182 million of cash on the balance sheet as of Q3 2020. Topgolf’s liquidity benefited from $180 million of new preferred equity raised in 2020 which will be converted to common equity as part of the acquisition by Callaway. Operating cash flow is not projected to turn positive until 2022 due to the disruption caused by the pandemic, but Moody’s expects Callaway will provide additional funding to complete the construction of additional venues. Topgolf executed an amendment in September 2020 that provides a covenant waiver period through Q1 2022, but will be subject to a minimum liquidity test of $30 million.”
Photo courtesy Topgolf
