S&P Global Ratings placed the debt ratings on CreditWatch with negative implications due to the potential spin-off of its Outdoor Products business.
Vista announced in May 2022 that it planned to separate its two businesses into independent, publicly traded companies.
The Outdoor Products business is expected to become a new, independent publicly traded company through a 100 percent tax-free spin-off to Vista shareholders. The remaining rated entity will be comprised of the Sporting Products business (largely ammunition). The transaction is targeted for completion in 2023.
S&P said while the final capital structure and debt allocation details have not been finalized, it believes there is a high probability that it could lower Vista’s ratings after the completion of the transaction, most likely because of the remaining entity’s profit volatility. As a result, it placed all of its ratings on Vista on CreditWatch with negative implications.
S&P said in its analysis, “The CreditWatch placement with negative implications reflects the probability that we could lower the ratings if the transaction is completed and we reassess business risk as unfavorable after the transaction is completed. Vista will have reduced business diversity, lower growth, and higher volatility compared with the existing consolidated entity. The company expects to unlock the value of its two businesses by pursuing distinct strategic and capital allocation priorities. It believes the aggregate valuation of the two stand-alone companies will be much higher than its current valuation as a combined business, benefiting shareholders.
“In our view, the spin-off of the Outdoor Products business increases the risk to Vista creditors. This is because the ammunition business, which makes up most of the company’s Sporting Products segment, has historically experienced high volatility tied to social factors and political cycles. Outdoor Products diversified the company with faster-growing and uncorrelated businesses. Of the company’s 12 brands that generate over $100 million in revenue, nine are in Outdoor Products. While Sporting Products contributes about 75 percent of combined EBITDA, we believe that the lifestyle nature and diversity of the Outdoor Product categories and their well-known brands with strong market shares make them more resilient, helping offset potential weakness in demand of the ammunition business.
“In addition to the business risk assessment, financial profile and financial policies will be key rating factors. We will assess Vista’s post-separation target leverage levels, acquisition strategy, dividend policy and share repurchase plans. Following the spin-off, Vista is expected to have the same long-term net leverage target of 1x-to-2x as it has today. Management stated that it plans to use Vista’s free operating cash flow (FOCF) for debt repayment and capital return to shareholders, including dividends and share repurchases.
“We will resolve the CreditWatch placement after the business separation is completed. We will also reevaluate the senior unsecured recovery rating after the debt structure is finalized and we have reassessed the default scenario enterprise value. We could lower the ratings on Vista if we unfavorably reassess the business risk profile to weak from fair, potentially due to reduced scale, less business diversity, and greater volatility. Alternatively, we could affirm the ratings if we maintain our fair business risk assessment, or if we believe the company will maintain adjusted leverage well below 2x.
“We will reassess our ratings if the transaction is not completed as planned.”
Photo courtesy Vista Outdoor/Remington
