Moody’s downgraded V.F. Corp’s long term ratings, including its senior unsecured debt rating to Baa1 from A3, senior unsecured shelf and MTN ratings to (P)Baa1 from (P)A3, subordinate shelf rating to (P)Baa2 from (P)Baa1, and preferred shelf rating to (P)Baa3 from (P)Baa2. The company’s P-2 short-term commercial paper rating was affirmed.
The rating outlook is stable. The changes conclude the review for downgrade, initiated on November 10, 2020.
“The downgrade reflects our expectation that VF Corp’s financial leverage will remain high over the next several years,” stated Mike Zuccaro, Moody’s vice president. “We expect debt/EBITDA (including standard adjustments such as leases) to sequentially improve from current levels over the next 12-to-18 months to around 3.5 times, a level that is still well above our prior 2.0 times leverage threshold.”
Moody’s said the downgrade also reflects key governance considerations, including a more aggressive financial strategy and leverage policy given the sizeable use of cash to fund the Supreme acquisition at a time when debt and leverage are high due to weaker revenue and earnings related to the COVID-19 and the $3 billion of incremental debt raised in April 2020 to boost cash liquidity.
While V.F. suspended share repurchases, it maintained its sizeable dividend payments. Nevertheless, VF Corp’s Baa1 rating also reflects the transaction’s strategic benefits, as Supreme will complement existing streetwear components in VF Corp’s core brand portfolio and accelerate VF Corp’s consumer-driven, retail-centric, hyper-digital transformation.
The affirmation of V.F. Corp.’s P-2 short-term commercial paper ratings reflects Moody’s expectation that VF Corp’s liquidity will remain excellent, supported by its remaining balance sheet cash, operating cash flow and ample excess availability under its unrated $2.25 billion unsecured revolving credit facility due 2023.
On December 28, 2020, VF Corp acquired Supreme Holdings, Inc., a direct-to-consumer focused streetwear apparel & accessories company, in an all-cash transaction valued at around $2.1 billion plus an additional earnout based on revenue and gross margin performance. Subject to certain conditions, Supreme’s founder will receive a portion of VF Corp equity’s purchase price over time.
Moody’s wrote, “V.F. Corporation’s Baa1 rating is supported by its significant scale as one of the largest apparel companies in the world, with broad diversification in the industry by product and distribution channel. It also owns several well-known brands with strong market positions in their segments, such as Vans, The North Face, Timberland, Dickies, and Supreme, with a successful long term track record of driving sustainable organic revenue growth across its portfolio. VF’s liquidity is excellent, supported by an estimated $1.65 billion of remaining balance sheet cash as of December 26, 2020, operating cash flow and ample excess availability under its unrated $2.25 billion unsecured revolving credit facility due 2023. The rating also reflects governance considerations, particularly a shift to more aggressive financial strategies and leverage policy. The company used a sizeable amount of cash to fund Supreme’s acquisition, and it has maintained sizeable dividend payments at a time of high risk and uncertainty stemming from the global coronavirus pandemic. While the company has a track record of cutting share repurchases, reducing acquisition debt and leverage, and maintaining strong credit metrics over the longer term, current leverage levels are high and will likely take several years to return to historical levels.”
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