Moody’s Investors Service lowered the debt ratings of West Marine’s term loan to reflect West Marine’s pending debt exchange. The exchange will result in the original term loans being subordinated in priority in terms of payment and collateral resulting in a lower expected recovery.
Moody’s report noted that West Marine reached an agreement on a Transaction Support Agreement with a group of existing lenders that will result in the debt exchange involving funding from West Marine’s parent, L Catterton.
Moody’s said that if the transaction is consummated as outlined, it will constitute a distressed exchange, which is an event of default under Moody’s definition. Upon the close of the transaction, Moody’s will append the Caa2-PDR with the “/LD” designation. The LD designation will be removed after three business days.
The TSA, according to Moody’s, contemplates an exchange offer whereby a new $30 million FILO facility will be put in place and consenting holders of the existing first lien term will be offered a new first lien term loan that will rank junior in priority payment and security to the ABL and FILO. The new tranche 1B (junior to tranche 1A) will consist of: (a) 50 percent of the existing incremental first lien debt issued to the company by its sponsor, L Catterton, (b) 50 percent of consenting parties of the existing second lien term loan and (c) non-consenting parties of the existing first lien term loan.
The new tranche 2A (junior to tranche 1B) will consist of: (a) the remaining 50 percent of the existing incremental first lien debt issued to the company by its sponsor, L Catterton and (b) the remaining consenting parties of the existing second lien term loan. Non-consenting parties of the existing second lien term loan will rank junior to tranche 2A. Moody’s will withdraw the existing term loan ratings upon close if 100 percent consent is achieved.
Moody’s downgraded Rising Tide Holdings, Inc., doing business as West Marine, senior secured first lien term loan to C from Caa3 and its senior secured second lien term loan to C from Ca. At the same time, Moody’s affirmed its corporate family rating (CFR) at Caa2 and its probability of default rating (“PDR”) at Caa2-PD. The outlook remains negative.
The affirmation of the Caa2 CFR reflects that despite the cash savings expected from the reduction of interest and amortization payments, a turnaround in performance is paramount in order to improve West Marine’s free cash flow.
Moody’s said, “West Marine’s Caa2 CFR is constrained by its very high Moody’s adjusted debt/EBITDA of almost 18x, free cash flow deficits, limited committed external sources of liquidity and high seasonality. The company operates in the marine aftermarket industry which is highly fragmented and very competitive. West Marine’s business shows some cyclicality with the discretionary nature of boating and marine aftermarket products. However, performance through downturns has proved to be more resilient than actual boat sales as these products have shorter replacement lives. In 2022, West Marine faced significant operational issues that it needs to quickly address under new management in order to restore its free cash flow and earnings while continuing to face a difficult supply chain and inflationary environment. West Marine’s credit profile is supported by its strong brand awareness and large scale relative to its competitors in the marine aftermarket industry with over 230 hub and service center locations across the US and Puerto Rico. West Marine’s capital structure is long dated with its nearest debt maturity not until its asset-based revolver expires in 2026.”
Photo courtesy West Marine
