SGB Media – Pure Fishing upsized its ABL revolver commitment to $250 million, issued an incremental $100 million first-lien term loan and a $25 million second-lien term loan, and used the proceeds to purchase Svendsen Sport A/S, a European provider of fishing equipment and consumables.
The moves were detailed in a rating update by S&P Global Ratings.
S&P said the transaction demonstrates Pure Fishing’s risk for conducting acquisitions using incremental debt while macroeconomic risks remain high. The rating agency said Pure Fishing’s leverage will likely remain very high through at least 2022 due to higher debt, and near-term demand for the company’s fishing and outdoor recreation products could moderate.
S&P affirmed its ‘CCC+’ issuer credit rating on Pure Fishing despite the very high leverage because liquidity remains adequate. Also affirmed was S&P’s ‘CCC+’ rating on the company’s first-lien debt. At the same time, S&P revised the recovery rating to ‘4’ from ‘3’ to reflect the significant incremental debt to acquire Svendsen, which in S&P’s view reduces recovery prospects for first-lien lenders.
The stable outlook reflects S&P’s beliefs that Pure Fishing can modestly reduce its very high leverage over the coming quarters, EBITDA will be able to cover fixed charges and liquidity will likely be adequate, which mitigates the chance of a downgrade over the next 12 months.
S&P said in its analysis, “Our updated forecast is for the company’s adjusted gross debt to EBITDA to be in the 7.5x-9.25x range in 2022, and this could be unsustainable if there is unexpected volatility in fishing equipment demand or inadvertent operating missteps over the next two years. We have assumed that demand could plateau in 2022 and moderate in 2023 as consumers return to other leisure activities that were not fully available during the pandemic. Demand and profitability could be hurt more than our base-case assumptions by macroeconomic risks and supply-chain disruptions because the company’s sales operations are global. For example, an escalation of the Russia-Ukraine conflict could lead to energy supply disruptions or price shocks. Sustained inflationary pressures or drag on economic growth following potential policy missteps by central banks could also erode profits. COVID-19 containment measures in Asia, which supplies about 40% of Pure Fishing’s resale products, are an additional macroeconomic risk and could cause supply shocks that slow the recovery of pro forma EBITDA margin compared to 2021. Supply-chain disruptions, including inventory constraints in Asia that increase unit prices, could expose the company to more negative working capital uses than budgeted during the year and could raise liquidity risk. We forecast Pure Fishing’s operating cash flow to be modest in 2022 following the negative operating cash flow in 2021, and any weakness in operating results would cause greater reliance on the ABL. Our base case is that Pure Fishing will be more than 40% drawn on its ABL commitments by the end of 2022, partly due to the Svendsen acquisition.
“The rating also reflects Pure Fishing’s appetite to engage in debt-financed acquisitions, notably of Plano in 2021 and Svendsen in early 2022. Svendsen’s purchase price was $153.4 million, with the potential for incremental earn-out payments of $22.5 million by mid-2022. These recent acquisitions introduce integration risks that could compound high leverage and financial risk.
“Despite the high financial risk, the outlook is stable because we forecast Pure Fishing will have adequate liquidity and sufficient fixed-charge coverage, mitigating the likelihood of a downgrade. The company had approximately $39 million in cash as of December 31, 2021. Incorporating the ABL capacity remaining after the Svendsen acquisition, we estimate total liquidity at the end of March 2022 at about $105 million, which is adequate based on our forecast of cash uses over the next 12-24 months. The liquidity profile leads us to believe that a near-term default is unlikely, partly because the company’s next debt maturity is 2025.
“In addition, if Svendsen’s and Pure Fishing’s organic results outperform our base-case forecast, which is possible as long as supply-chain disruptions subside, the capital structure could be sustainable. Our understanding is that Svendsen is a leading fishing tackle provider in Europe with a relatively high mix of sales in consumables, which tend to have a higher margin than durables. Therefore, Svendsen could be accretive to the consolidated entity’s EBITDA margin on a pro forma basis. Svendsen’s purchase multiple (including earn-out payment) is approximately 6x based on the 2022 budgeted EBITDA, which could be deleveraging for Pure Fishing if the budget is realized.
“Pure Fishing’s retailer concentration makes it vulnerable to potential inventory corrections. The company participates in the highly fragmented and competitive fishing equipment market, which could be prone to supply and demand mismatches. Pure Fishing has faced significant operating challenges over the last few years, resulting in year-over-year revenue declines from 2017 to 2019. We believe these declines stemmed partially from retailer inventory corrections, particularly following the merger of Bass Pro Shops and Cabela’s. Additional disruptions in the company’s concentrated retailer base could result in further volatility in the company’s small revenue and cash flow bases, as inventory policy and purchasing decisions by its largest customers can have a significant effect on the company’s revenue. We believe this revenue volatility is demonstrated by the company’s year-over-year revenue declines from 2017 to 2019 that were partially a result of inventory corrections at some of its largest retailers. The company’s revenue declines could also be indicative of market share losses to large competitors such as Daiwa, Shimano and Rapala, as we believe that competitors’ revenue might not have declined over the same period.
“The stable outlook reflects our belief that Pure Fishing can modestly reduce its very high leverage over the coming quarters, EBITDA will be able to cover fixed charges, and liquidity will likely be adequate, which mitigates the chance of a downgrade over the next 12 months.”
“We could revise our outlook to negative or lower our ratings on Pure Fishing if we believed revenue and EBITDA will significantly underperform our base case. We could also lower the rating if operating cash flow is weak and leads to prolonged and increased reliance on the ABL, thereby straining the company’s liquidity.
“We could revise the outlook to positive or raise the ratings if we became confident the company could sustain a level of revenue and EBITDA or reduce its debt in a manner that could result in lease-adjusted debt to EBITDA below 7x.”