Varsity Brands, the parent of BSN Sports, Varsity Spirit and Herff Jones, plans to extend the maturity on its $1.33 billion senior secured first lien term loan by two years to December 2026, according to Moody’s. Moody’s assigned a B2 rating to the debt.
Moody’s took no action on Varsity Brands’ B3 Corporate Family Rating (CFR), B3-PD Probability of Default Rating (PDR), or B2 rating on the senior secured first lien notes due December 2024. The outlook is stable.
Moody’s said that as part of Varsity Brands’s loan amendment, consenting owners will be rolled into a new first lien term loan tranche maturing December 2026 from December 2024. The amendment will also increase the margin on the first lien term loan and move the first lien term loan to SOFR from LIBOR with a flat credit spread adjustment (“CSA”).
Concurrently, Varsity Brands will extend the maturity of its asset-based revolving credit facility. The company also plans to increase the borrowing capacity from $180 million to $350 million but put in place various limitations on ABL uses including ABL proceeds cannot be used to repay the second lien term loan and a limit on the amount of debt drawn on its ABL for any consecutive 90 day period. Varsity Brands will also extend the maturity of the unrated senior secured second lien term loan to April 2027, which is 120 days past the proposed new first lien term loan maturity. The company will also move the second lien term loan to SOFR with a flat CSA and increase the margin. The incremental interest on the second lien term loan will be paid in kind (PIK).
Moody’s said it views the amend and extend transaction as a credit positive as it addresses the significant December 2024 debt maturities and refinancing need. Higher debt and interest expense are credit negative but can be accommodated within Moody’s expectations for the B3 CFR and stable outlook. Leverage may modestly increase at close as the company may fund financing fees with revolver borrowings. The estimated $20 million increase in annual interest will reduce free cash flow and interest coverage. The amendment also puts in place first lien lender protections against aggressive restructuring transactions including subordination of existing lenders through new priority debt exchanges, collateral stripping or transfers to unrestricted subsidiaries, and release of guarantees by non-wholly owned subs. Moody’s expects solid demand across end-markets served by BSN Sport and Varsity Spirt and strong operational performance to more than offset a weaker but improving EBITDA margin at Herff Jones. Moody’s expects debt to EBITDA to improve to just north of 7.0x over the next twelve months from 8.6x as of September 2022 and return to positive free cash flow in the $5 to $15 million range as working capital headwinds moderate.
Moody’s said in its analysis, “Varsity Brands’ B3 CFR reflects the company’s very high financial leverage and weak free cash flow. Seasonality causes volatility in operating results and cash flow. Further, the mature Herff Jones business segment faces secular headwinds as consumer demand for affinity products gradually erodes. However, Moody’s expects debt to EBITDA to decline to around 7.2x over the next 12 to 18 months from 8.6x for the last twelve months ending September 30, 2022 supported by strong demand and operating performance across BSN and Varsity Spirit and EBITDA margin improvement at Herff Jones as a recent investment into operational efficiency starts to yield results. Sales and EBITDA have largely recovered since the pandemic when school closures and the cancellation of sports and cheer competitions and camps disrupted the business. Moody’s also expects positive free cash flow in 2023 of around $5 to $15 million as working capital improves. Varsity Brands has a strong position within niche school apparel, athletic and achievement markets and decent diversification across its segments. Products are relatively nondiscretionary due to their key role in school milestones or utilization in sporting/cheer events that generally remain steady regardless of economic conditions. Moody’s expects debt-funded acquisitions will likely continue to supplement growth over time. Varsity Brands has high governance risks primarily related to its aggressive financial strategy under private equity ownership, including operating with high leverage and use of debt to fund acquisitions.”
Photo courtesy Varsity Brands