Moody’s Investors Service, upgraded Vista Outdoor Inc.’s new senior unsecured eight-year notes’ rating to B2 from B3.

All other ratings for the company including the B1 Corporate Family Rating (CFR) and the B1-PD Probability of Default rating remain unchanged. Moody’s took no action on the B3 rating on the existing $350 million senior unsecured notes due 2023 as these notes will be repaid and Moody’s expects to withdraw the rating upon close. The outlook remains positive and the Speculative Grade Liquidity Rating remains SGL-1.

The upgrade follows the company’s announcement to upsize its new senior notes to $500 million from $350 million¹ and reflects improved recovery for that class of debt given it now comprises a higher share of the overall capital structure while the CFR is unchanged. Net proceeds of the new notes will be used for general corporate purposes and primarily for the refinancing of the existing senior unsecured notes due 2023. The refinancing favorably extends Vista’s unsecured debt maturities to 2029 from 2023. Moody’s expects Vista will use excess proceeds from the transaction to initially bolster liquidity and ultimately for investment and acquisitions that increase the company’s earnings base and potential share repurchases. The CFR and positive outlook re not affected because Vista’s leverage remains low and earnings are projected to grow in 2021.

Ratings Rationale
Moody’s wrote, “Vista’s B1 CFR reflects its leading position as one of the largest ammunition manufacturers in the US, its leading brands in multiple niche outdoor product categories and favorable US outdoor activity participation trends. The rating also reflects its low debt to EBITDA leverage of 2.2x as of December 27, 2020 (Pro-forma for the upsizing of notes). Vista’s credit profile is constrained by the volatility in non-law enforcement-related ammunition demand, difficulties sustaining organic revenue growth in the competitive outdoor products market, and societal risks of its ammunition products.

“The ratings also reflect Moody’s expectation that the company’s operating performance will remain strong over the next 12 to 18 months as ammunition demand remains robust and as the company continues to work through its material backlog. The anxiety caused by the pandemic and high political discord in the U.S. will continue to sustain demand for ammunition at higher levels as new gun owners enter the market and existing owners stockpile ammunition. Additionally, the company’s outdoor segment will remain strong as consumers continue to seek outdoor activities due to the coronavirus. Moody’s expects Vista’s fiscal year ended March 2022 annual sales to reach $2.2 billion and EBITDA to improve to approximately $290 to $300 million with debt to EBITDA maintained at around 2.0x.

“The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continues to disrupt economies and credit markets across sectors and regions. Moody’s analysis has considered the effect on the performance of Vista from the currently weak U.S. economic activity and a gradual recovery for the coming months. Although the economic recovery is underway, it is tenuous, and its continuation will be closely tied to the containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The consumer durables industry is one of the sectors most meaningfully affected by the coronavirus because of exposure to discretionary spending.

“Moody’s believes social risk will remain high for Vista due to its participation in the gun ammunition industry, although the risk has decreased after its exit from firearms manufacturing after divesting Savage Arms in July 2019.

“Governance factors include a favorable financial policy including a net debt-to-EBITDA target that was reduced in February to 1-2x (based on the company’s calculation). Vista also does not pay a dividend, but share repurchases and potential debt-funded acquisitions create some event risk.”

Photo courtesy Vista Outdoor