S&P Global Ratings upgraded the debt ratings of Varsity Brands Holding Co., Inc. as the company’s financial performance continues to improve as it recovers from the pandemic lows.
Varsity Brands owns Herff Jones, BSN Sports and Varsity Spirit.
S&P raised its issuer credit rating on the company to ‘B-‘ from ‘CCC+’. At the same time, it raised its issue-level rating on its senior secured credit facilities to ‘B-‘ from ‘CCC+’. The ‘3’ recovery rating is unchanged. The stable outlook reflects S&P’s expectation for modestly positive free operating cash flow (FOCF) and S&P Global Ratings-adjusted leverage in the high-7x area over the next 12 months, improving performance across all its business segments.
S&P said, “The upgrade reflects improved credit metrics as COVID-19 pandemic-related hurdles continue to dissipate and our expectation for satisfactory performance over the next year. For the quarter ended March 26, 2022, Varsity’s net sales increased 55 percent compared to the same period in the prior year, primarily driven by a recovery in the BSN Sports segment, which is somewhat inflated due to the return to seasonality in the Varsity Spirit segment (cheerleading competitions usually held in the first quarter were delayed to the second quarter in 2021 but resumed a regular schedule in 2022) and pull forward of orders in the Herff Jones segment. However, the company recognized that the aggregate recovered most sales lost during the pandemic.
“Revenue and order rates for BSN Sports exceeded 2019 levels due to the gradual return of school sports events, and we expect this to continue as COVID-19 restrictions ease. In addition, the company will likely increase revenue and market share through tuck-in acquisitions of local dealers that already have established customer relationships. While we expect moderate improvement in Varsity Spirit, we forecast 2022 revenues will remain about 10 percent below 2019 revenues as participation rates take longer to recover (some All-Star clubs went out of business during the pandemic) and competition increases. Although Herff Jones’ revenue is trending above 2019, we believe that the clear risk of a secular decline in this segment remains as target consumers continue to shift to digital-focused products, especially for yearbooks, demand for which already softened before the pandemic.
“Nevertheless, we now expect consolidated revenue in 2022 will exceed 2019 levels, and the company will benefit from cost-saving initiatives it implemented during the pandemic, resulting in positive FOCF during the year and stronger credit metrics, including EBITDA interest coverage above 1.5x.
“We forecast Varsity Brands will remain highly leveraged over the long term. S&P Global Ratings-adjusted leverage improved to about 8.2x for the last 12 months ended Mar. 26, 2022 from about 15.8x at the end of 2020. We now project leverage will reduce further to just below 8x at end of 2022. We do not anticipate significant improvement even when the business fully recovers, reflecting management’s consistent merger and acquisition (M&A) activity and our view that financial sponsor-controlled companies will pursue aggressive financial strategies prioritizing shareholder returns or acquisitions over permanent debt reduction. Additionally, our base-case forecast assumes Varsity Brands will refinance its senior secured credit facilities well ahead of its maturity in December 2024.
“We expect Varsity Brands to effectively manage input-cost pressures and supply chain constraints. We anticipate commodity, freight, and wage-related inflationary pressures will persist over the near term. However, our base-case forecast assumes Varsity Brands will offset short-term cost pressures via pricing actions and operating leverage. Additionally, we understand the company continues to face supply chain-related disruptions, particularly in Herff Jones and BSN Sports. It has had difficulty fulfilling orders because of global shipping bottlenecks. We expect supply chain constraints will subside over the year. Until then, the company’s strategy of requesting that customers order well in advance to avoid delays and pushing its private-label products as an alternative to third-party vendors should help to avoid substantial loss of sales.”
Photo courtesy BSN Sports/Varsity Brands
