Moody’s Investors Service downgraded Wahoo Fitness Acquisition, LLC, reflecting the bike training manufacturer’s “material underperformance” relative to Moody’s previous expectations and the elevated risk of default.

Moody’s,¬†in mid-September, had already lowered its rating on the company.

Moody’s lowered Wahoo’s Corporate Family Rating (“CFR”) to Caa3 from B3, its Probability of Default Rating (“PDR”) to Caa3-PD from B3-PD, and the rating on the company’s senior secured first lien credit facility to Caa3 from B3.¬†

The first lien credit facility consists of a $30 million first lien revolver due 2026 and a $225 million original principal amount first lien term loan due 2028. The outlook is negative.

Moody’s said, “Today’s downgrade and negative outlook reflects Wahoo’s material underperformance relative to Moody’s previous expectations and the elevated risk of default, including a distressed exchange due to the company’s meaningfully constrained liquidity and unsustainable capital structure at the current earnings level. Wahoo reported meaningfully lower operating results for the second quarter period of fiscal 2022, with year-over-year revenue declining by more than 50 percent and with negative EBITDA for the period. Although Moody’s anticipated that elevated channel inventory and deep competitive discounting will pressure operating results in fiscal 2022, the drop in sales and earnings during the first half of 2022 is materially greater than Moody’s previous expectations.

“Wahoo recently launched several new products which it expects to spur demand from its loyal customer base. The company expects the contribution from new product launches, combined with the seasonal trainer demand, will help to sequentially improve operating results during the second half of 2022. However, persistently high inflation and the shift in consumer spending from goods to services will continue to pressure consumer demand for discretionary goods, including the company’s bike trainers and related products. Also, the high promotional activity in efforts to improve sell-through and reduce inventories alongside increased competition will continue to pressure profitability. In addition, the macroeconomic conditions in Europe, the company’s largest market, continue to deteriorate, given the ongoing geopolitical conflict and its impact on energy costs. As a result, Moody’s now projects that Wahoo’s revenue will decline by about a third and EBITDA by more than 80 percent in fiscal 2022, with debt/EBITDA increasing to over 18x and a free cash flow deficit in the $50 million range.

“As a result, Moody’s views Wahoo’s capital structure as unsustainable absent a meaningful improvement in 2023, and the company’s weak liquidity reflects the very likely financial maintenance covenant violation once the covenant test is reinstated in December. Given Wahoo’s meaningfully lower earnings, Moody’s anticipates the company will not comply with the first lien credit facility’s maximum total net leverage financial covenant of 7.0x, which will be tested at the end of fiscal 2022. In addition, the leverage test steps down to 5.5x in the first quarter period of 2023. Thus, the likelihood of an event of default, including a distress exchange is very high over the next six months. In efforts to improve its near-term liquidity and profitability, Wahoo is implementing cost savings initiatives that include expense control and improvement in working capital through extended payment terms and a reduction in inventory purchases. Although the company completed an amendment that temporarily waived the financial maintenance covenant and received an approximately $12 million new equity investment in May 2022, an additional covenant amendment will be challenging given the current difficult market conditions and weakening economic outlook.

“Wahoo’s $7 million of cash at the end of June and unused capacity on the $30 million revolver ($14 million drawn as of June 2022) does not provide a significant amount of leeway to fund debt service if the company is unable to stem the sizable cash consumption experienced since the July 2021 leverage buyout. A capital contribution from the founder or private equity owner Rhone Group could help bolster cash sources and obtain a covenant amendment, but Moody’s believes there is risk that the structure of a transaction and use of any cash received could constitute a distressed exchange. The risk of a distressed exchange is reflected in a change in the governance issuer profile score to G-5 from G-4 and the credit impact score to CIS-5 from CIS-4.”

Founded in 2009, Wahoo Fitness is a designer and distributor of indoor cycling and endurance training products such as indoor bike trainers and related accessories, GPS bike computers, bike pedals, sensors, and applications. Following the July 2021 leverage buyout transaction, the company is majority owned by Rhone Group, with the company’s founder having a significant ownership investment and other shareholders holding a minority stake. Wahoo reported revenue of under $500 million for fiscal 2021.