S&P Global Ratings said it is revising its outlook on the debt ratings of Winnebago Industries to stable from negative. The rating’s agency believes RV demand could grow at least over the next few months as new buyers entering the market offset high unemployment.

S&P affirmed the ‘B+’ issuer credit rating on Winnebago and assigned a ‘BB’ issue-level rating and ‘1’ recovery rating to Winnebago’s proposed $300 million senior secured notes. The $300 million offering is expected to be used to repay the existing term loan and add cash to the balance sheet to bolster liquidity.

S&P said the stable outlook reflects the current backlog at Winnebago that could translate into higher RV demand through fiscal 2020, which ends in August, and possibly into fiscal 2021. As a result, S&P believes Winnebago will generate sufficient EBITDA to maintain its measure of anticipated leverage well below the 5x downgrade threshold at the current ‘B+’ rating, notwithstanding the sharp EBITDA decline experienced in recent months.

S&P said, “The outlook revision and ‘B+’ rating affirmation incorporate our updated forecast for adjusted debt to EBITDA in the 3.25x-4.25x range in fiscal 2020 and 2021 and reflect robust near-term demand for RVs. Winnebago’s fiscal third-quarter results, backlog, and recent comments and disclosures by RV industry participants suggest fiscal 2020 and 2021 results could be favorable compared to our previous forecast published on March 27, 2020, despite continued significant macroeconomic headwinds and uncertainty surrounding COVID-19 containment. On March 27, we assumed Winnebago’s fiscal 2020 total revenue would grow in the 5 percent to 15 percent range incorporating acquired revenue from Newmar, fiscal 2021 revenue could decline 10%-20%, and that adjusted debt to EBITDA could be in the 4x-4.5x range through fiscal 2021. We have favorably revised our base-case assumptions so that revenue growth in fiscal 2020 is at the high end of our five percent to 15 percent range, fiscal 2021 revenue shows modest organic growth year-over-year, and adjusted debt to EBITDA will be in the 3.25x-4.25x range through fiscal 2021. Our updated leverage forecast has a cushion compared to our 5x downgrade threshold, which is supportive of our stable outlook. Our assumptions incorporate continued growth in Winnebago’s towables segment supported by Grand Design’s market share gains as well as the motorhomes segment’s improved financial results partly supported by the Newmar acquisition and recent initiatives to reduce fixed costs.

“Recent RV industry earnings disclosures, executive interviews, and credible press reports have commented on a spike in retail RV demand in late April, May, and June. Winnebago reported that its backlogs in terms of towables and motorhomes units were up 87 percent and 99 percent respectively as of May 2020, representing significant increases year-over-year. While backlogs are an imperfect indicator and subject to cancellation or postponement by dealers at any time without penalty, the increases suggest at least a temporary surge in demand that provides confidence in our fiscal 2020 forecast. In addition, Winnebago’s management indicated that retail sales during the remainder of calendar 2020 could increase year-over-year and that wholesale shipments could increase by at least the same rate, providing visibility into fiscal 2021 results. We believe the demand could be attributable to consumers’ perception that RV travel is safer and more amenable to social distancing compared to other travel options. Competing travel and leisure options, including those requiring flight, hotel stays, or mass gatherings, have diminished during recent months, which could have fostered pent-up demand and a cushion of discretionary income among consumers. Beyond the healthy level of annual RV demand seen in recent years, the COVID-19 pandemic could be attracting new buyers, particularly those who are younger, family-oriented, or may be able to work remotely. Additionally, it is our understanding that the baby boomer demographic that drives a sizeable portion of RV demand is less affected by the current spike in unemployment, which has tended to disproportionately impact lower-wage and hourly wage workers who may face a hurdle to obtain consumer financing. Other benign factors, including historically low-interest rates, government stimulus supportive of the stock market and related wealth effects, and low fuel costs are also indicative of near-term demand. Therefore, the RV industry could gain share in the overall travel market over our forecast period through fiscal 2021.

“Key risks include sustainability of demand, uncertainty surrounding the economy and coronavirus containment, and the highly competitive dynamics of the RV industry. Our updated base-case forecast for Winnebago assumes growth over at least the next fiscal year while the recession is ongoing, which would be anomalous compared to previous recessions when RV industry demand dropped precipitously. Winnebago’s business is typically highly cyclical and its products are highly discretionary. The company experienced negative EBITDA during some prior recessions. The cyclicality of Winnebago’s business probably increased during recent years through the acquisitions of manufacturers of premium and luxury products, including Newmar, Chris-Craft, and Grand Design. Greater exposure to higher-end and big-ticket products could exacerbate the impact of a consumer downturn. Financial risk over the coming years could spike if RV demand is not sustained in a manner that enables Winnebago to quickly adjust its cost structure up or down in response to sharp changes in demand. Winnebago’s financial results could be impacted if unemployment adversely affects the target customer demographic, or if coronavirus containment efforts reintroduce variability in factory production and revenue generation.

“In addition, the RV industry is highly competitive and has previously experienced an industry-wide inventory correction as a result of mismatched wholesale shipments and retail demand, which caused significant shipments declines for a period of time. In the current environment, original equipment manufacturers (OEMs) may compete for market share when consumer demand is perceived to be strong and temporary, which could cause inadvertent overproduction and excess inventory in the channel. Such dynamics could introduce variability in revenue growth, EBITDA margin, and working capital uses of cash if the RV industry does not accurately cope with retail demand.

“The proposed senior secured notes issuance will further bolster liquidity and enable Winnebago to withstand the recession over the next few years. We estimate that Winnebago has adequate liquidity for at least 12 months even in a low-revenue scenario and that the liquidity runway is even longer under our base-case and revenue forecast. Winnebago had $152 million of cash balances and full availability under its $192.5 million asset-based lending credit facility as of May 2020. Incorporating the proposed $300 million senior secured notes issuance and term loan repayment, Winnebago would have pro forma liquidity of $383.5 million. Although we do not net cash against debt in our measure of adjusted leverage for highly cyclical companies such as Winnebago, the company’s substantial cash balances mitigate financial risk and provide flexibility to fund operating investments or working capital uses if needed. To the extent that a surge in RV demand is sustained and results in higher revenues than assumed in our base case, Winnebago’s liquidity profile would be enhanced. It is our understanding the cash balances are partly intended to enable the company to navigate unanticipated business disruptions, fund operating and investment uses, and return capital to shareholders in the form of a regular dividend. We expect the proposed senior secured notes will provide additional flexibility to the liquidity profile as they eliminate the maximum senior secured net leverage ratio covenant and principal amortization payments associated with the existing term loan.”

Photo courtesy Winnebago