S&P Global Ratings lowered its issuer credit rating on Vista Outdoor to ‘B’ from ‘B+’ because profitability is expected to remain weak in fiscal 2020 and leverage to remain above five times.
At the same time, S&P said it was lowering its issue-level rating on the company’s senior unsecured notes to ‘B’ from ‘B+’. The ‘3’ recovery rating remains unchanged, indicating expectation for meaningful (50 percent to 70 percent, rounded estimate: 55 percent) recovery in the event of a payment default.
The stable outlook reflects S&P’s expectation that Vista’s leverage will remain in the 5.0x-5.5x range over the next 12 months supported by transformation costs that will roll off and profitability initiatives that should improve margins.
S&P said, “The downgrade reflects our expectation for the company to maintain leverage between 5x and 5.5x through fiscal 2020 as ammunition headwinds persist and outdoor product sales remain soft. We believe weaker retail demand and additional tariffs on imports from China will continue to hurt overall profitability. New management has taken steps to turnaround the business and deleverage, but we believe it will take a few years before leverage declines back to below 5x, absent a sizable divestiture.
“The stable outlook reflects our expectation that leverage will remain in the low- to mid-5x range over the next 12 months, supported by transformation costs and profitability initiatives.
“We could lower the ratings if we expect leverage to be more than 7x or if the company generates minimal free cash flow. This could happen from weaker operating performance due to additional customer bankruptcies, a greater downturn in the ammunition market, or a severe recession that pressures discretionary purchases in the outdoor sports segment.
“Although unlikely during the next year, we could raise the ratings if we believe the company can keep leverage below 5x and generate free cash flow of at least $50 million. We believe the company could reduce leverage below 5x if it improves EBITDA margins by more than 110 basis points from fiscal 2019, and adheres to its debt repayment plan, including utilizing the proceeds from asset sales.”
