S&P Global Ratings lowered its debt ratings on Wahoo Fitness Acquisition, LLC on its expectation that the U.S.-based fitness technology company would pursue a debt restructuring or distressed exchange over the next six months due to a liquidity shortfall.

S&P lowered its issuer credit rating on the company to ‘CCC-‘ from ‘CCC’ to reflect its view that a default scenario is likely in the upcoming months.

At the same time, S&P lowered its issue-level rating on Wahoo’s senior secured credit facilities to ‘CCC’ from ‘CCC+’. The ‘2’ recovery rating is unchanged, indicating its expectation for substantial (70 percent to 90 percent; rounded estimate: 70 percent) recovery in the event of a payment default.

The negative outlook reflects its expectation that the tough operating conditions will persist over the near term, causing the company to face a liquidity shortfall over the next six months absent a liquidity-enhancing transaction.

S&P said in its analysis, “Wahoo’s capital structure is unsustainable given its negative EBITDA and cash flow. We assess the company’s liquidity as weak because its liquidity sources are insufficient to cover its cash needs over the next 12 months. Wahoo had minimal cash on hand and no availability under its revolver as of the end of 2022 after funding its quarterly interest and mandatory debt amortization payments. Further, we expect its operating conditions will remain pressured over the next few months as it laps the COVID-related demand tailwinds it benefitted from last year. This will lead it to generate negative free operating cash flow (FOCF), which, along with the higher interest expense on its floating-rate debt, will likely lead to a near-term liquidity shortfall. We forecast Wahoo will also violate its consolidated total net leverage covenant, which became effective as of Dec. 31, 2022, adding to its default risk in the first half of 2023.

“Wahoo’s operating performance continues to deteriorate amid the weakening macroeconomic environment as consumer spending shifts toward non-discretionary categories.

“The company’s sales during the third quarter of fiscal year 2022 declined by 56 percent year over year, and we estimate they fell by an additional 35 percent in the fourth quarter of 2022. The demand for Wahoo’s products deteriorated because consumers shifted their purchasing behavior, which led to a sharp drop in its retailers’ inventory replenishment orders. The company continues to be affected by high costs related to commodities, freight and warehousing, which it cannot offset with higher prices given the aggressive promotional activity by its competitors. Additionally, the promotional activities to manage its elevated inventory levels, including Cyber Week discounts, continue to drag on its profitability. Therefore, we expect the company will report negative EBITDA in 2022. In addition, we do not expect Wahoo will be able to significantly improve its profitability and cash flow amid the weakening macroeconomic environment, reduced consumer discretionary spending, and ongoing shift in consumer spending toward other categories.

“The negative outlook reflects our expectation that the tough operating conditions will persist over the near term, causing the company to face a liquidity shortfall over the next six months absent a liquidity enhancing transaction.”