S&P Global Ratings lowered the debt ratings of Wolverine World Wide Inc. because it expects the footwear company’s revenue and profitability will be significantly impaired by lower consumer demand in the U.S. and retail store closures related to measures taken to contain the spread of the COVID-19 pandemic.
S&P Global Ratings now forecasts the company’s leverage to peak over 4x in 2020 and return to the 3x area in 2021.
S&P’s issuer credit rating was lowered to ‘BB’ from ‘BB+’. S&P affirmed its ‘BBB-‘ issue-level rating on the company’s first-lien credit facility despite the issuer downgrade due to the rating cap of ‘BBB-‘ on the secured debt of speculative-grade issuers. The recovery rating remains ‘1’, indicating its expectation for very high (90 percent-100 percent; rounded estimate 95 percent) recovery in the event of a payment default.
At the same time, S&P said it is lowering its rating on the company’s unsecured notes to ‘BB’ from ‘BB+’. The recovery rating remains ‘4’, indicating S&P’s expectation for average (30 percent-50 percent; rounded estimate 40 percent) recovery in the event of a payment default.
The negative outlook reflects the risk the company’s operations will remain challenged amid a slow recovery in consumer spending and key retail customers’ potential inability to recover from the effect of mandated store closures, and leverage is sustained above 4x in 2021.
S&P said, “Although the company had a successful 2019 holiday season and performed well the first two months of 2020, its aggressive debt-funded share repurchases in 2019 left the company with little room to weather the COVID-19 pandemic at the ‘BB+’ rating level. The company ended 2019 with adjusted leverage in the mid-3x area (mid- to high-2x area, excluding the approximately $80 million environmental mitigation cost accrual). We now forecast the company’s leverage will peak above 4x in 2020 and will be sustained in the 3x area in 2021. All of WWW’s own retail stores and most of its key customers’ stores are closed. The company’s and its wholesale partners’ digital channels remain open-–and demand is growing in the double-digit percent in this channel-–but, because it represents about 30 percent of the company’s overall revenue, it will not offset the lost sales from the closed brick-and-mortar stores. Additionally, we expect the second half of the year to be weak as well, even as stores reopen because wholesale customers are reducing orders for fall 2020. We estimate the company’s wholesale revenue could drop as much as 50 percent in 2020. Longer-term, key retailers’ potential inability to recover from the fallout of the pandemic and weak consumer demand in a recession could further impair WWW’s recovery in 2021, which would lead to adjusted leverage sustained above 4x.
“The negative outlook reflects the potential for a lower rating if we believe the company’s leverage will be sustained above 4x in 2021.
‘We could lower our rating if the COVID-19 pandemic’s effect on WWW is worse than we currently forecast. Prolonged store closures, low consumer demand for the company’s products, and potential disruption from key customers not surviving the recession could result in weaker cash flow generation for 2020 and 2021. This could lead to WWW’s adjusted leverage to be sustained above 4x in 2021.
“We could revise the outlook to stable if WWW can weather the pandemic and return to growth with leverage below 4x in 2021.”
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