Moody’s Investors Service upgraded Vista Outdoor Inc.’s Corporate Family Rating (CFR) to Ba3 from B1. Concurrently, Moody’s upgraded Vista’s Probability of Default Rating to Ba3-PD from B1-PD, and upgraded its senior unsecured notes rating to B1 from B2. The Speculative Grade Liquidity Rating remains SGL-1. The outlook is stable.
The ratings were upgraded because Vista’s operating performance has materially improved and Moody’s expects that the company’s credit metrics will remain robust over the next 12-to 18-months as strong demand for ammunition continues and the company works through its material backlog. Additionally, Vista’s stronger market position in the ammunition business with the acquisition of Remington, which historically compromised margin for volume, will allow the company to reduce earnings pressure through troughs in the cyclical ammunition business. Moody’s further expects cost reductions, and acquisitions in the outdoor sports and recreation market will also contribute to higher earnings in the next downturn than in the fiscal year March 2020 during the low point in the last ammunition market cycle.
The upgrade also reflects that Vista has pursued a more conservative financial policy over the past two years by permanently reducing a significant amount of debt and financial leverage. The company reduced its financial leverage target range between 1.0x -2.0x net debt to EBITDA, based on the company’s calculation, thus providing it with ample flexibility to manage business volatility and for future acquisition growth opportunities. Over the next 12-to-18 months, Moody’s expects Vista’s annual sales to continue to grow by high-single-digits while operating profits will continue to remain robust at around $250 million. Moody’s also anticipates that the company will generate a strong annual free cash flow of about $200 million with Moody’s-Adjusted Debt to EBITDA maintained at between 1.5x to 2.0x.
The current political climate and the increase in crime in some metropolitan areas continue to drive strong demand for ammunition as consumers seek ways for self-defense. Additionally, the focus by lawmakers on gun control legislation further drives near-term growth in guns and ammunition ahead of any potential restrictions. Moody’s expects that any near-term legislation will have minimal impact on Vista’s business as lawmakers remain divided on the level of gun regulation which is mostly focused on regulation related to background checks rather than with limitation on ammunition. However, from an ESG perspective, the sale of ammunition carries high social risks and negatively affects market perception.
The stable outlook reflects Moody’s expectation that demand for Vista’s products will remain robust over the next 12-18 months and that the company will be well-positioned to handle a cyclical downturn past this period. The outlook also reflects Moody’s expectation that management will maintain good liquidity and credit metrics including debt-to-EBITDA below 3.0x during cyclical low points in ammunition demand.
Moody’s said the SGL-1 reflects the company’s very good liquidity expected over the next 12 months as the company will continue to generate an annual free cash flow of approximately $200 million and has no debt maturities until the notes mature in 2029. Additionally, Vista has $243 million of cash as of March 2021 and Moody’s expects that the company will maintain the availability of $450 million under its undrawn ABL revolver facility that expires in 2026 and good covenant cushion.
Photo courtesy Vista Outdoors/Terminal Ascent