Pure Fishing extends loan commitments to support Svendsen acquisition
Pure Fishing increased its ABL revolver commitment to $250 million, issued an additional $100 million senior term loan and $25 million second lien term loan, and used the proceeds to buy Svendsen Sport A/S, a European supplier 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 of making acquisitions using additional debt while macroeconomic risks remain elevated. The rating agency said Pure Fishing’s leverage is likely to remain very high through at least 2022 due to higher debt, and short-term demand for fishing and recreational products outdoor business could moderate.
S&P confirmed its ‘CCC+’ issuer credit rating on Pure Fishing despite the very high leverage as liquidity remains adequate. S&P’s “CCC+” rating on the company’s senior debt was also affirmed. At the same time, S&P revised the recovery rating from “3” to “4” to reflect the significant additional debt to acquire Svendsen, which S&P says lowers the recovery outlook for senior lenders.
The stable outlook reflects S&P’s beliefs that Pure Fishing can modestly reduce its very high leverage over the next few quarters, EBITDA will be able to cover fixed charges and liquidity will likely be adequate, mitigating downside risk. deterioration over the next 12 months.
S&P said in its analysis: “Our updated forecast is that the company’s adjusted gross debt to EBITDA is in the 7.5x-9.25x range in 2022, and that could be unsustainable in the event unexpected volatility in demand for fishing gear or inadvertent operating missteps over the next two years We have assumed that demand may peak in 2022 and moderate in 2023 as consumers return to other leisure activities that were not fully available during the pandemic Demand and profitability may be more affected than our baseline assumptions by macroeconomic risks and supply chain disruptions as sales operations are global, for example an escalation of the Russian-Ukrainian conflict could lead to energy supply disruptions or price shocks. Sustained pressures or a slowdown in economic growth following potential policy missteps by central banks could also erode earnings. The COVID-19-related containment measures in Asia, which supplies approximately 40% of Pure Fishing’s resale products, pose an additional macroeconomic risk and could cause supply shocks that will slow the recovery of the 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 than expected working capital uses during the year and could increase liquidity risk. We expect Pure Fishing’s operating cash flow to be modest in 2022 following negative operating cash flow in 2021, and any weakness in operating results would lead to greater reliance on ABL. Our base case is that Pure Fishing will derive over 40% of its ABL commitments by the end of 2022, partly due to the acquisition of Svendsen.
“The rating also reflects Pure Fishing’s appetite to engage in debt-financed acquisitions, including Plano in 2021 and Svendsen in early 2022. Svendsen’s purchase price was $153.4 million, with potential additional payments of $22.5 million by mid-2022. These recent acquisitions introduce integration risks that could compound high leverage and financial risk.
“Despite the elevated financial risk, the outlook is stable as we expect Pure Fishing to have adequate liquidity and sufficient fixed cost coverage, mitigating the likelihood of a downgrade. The company had approximately $39 million in liquidity as of December 31, 2021. Including remaining ABL capacity after the Svendsen acquisition, we estimate total liquidity at the end of March 2022 at approximately $105 million, which is adequate based on our usage forecasts. over the next 12 to 24 months. The liquidity profile leads us to believe that a near-term default is unlikely, in part because the company’s next debt maturity is 2025.
“Additionally, if organic results from Svendsen and Pure Fishing exceed our baseline guidance, which is possible as long as supply chain disruptions subside, the capital structure could be sustainable. Our understanding is that Svendsen is one of the leading tackle suppliers in Europe with a relatively high mix of consumables sales, which tend to have a higher margin than durable goods. Therefore, Svendsen could have an accretive effect on the EBITDA margin of the consolidated entity on a pro forma basis. Svendsen’s buy multiple (including earn-out payment) is approximately 6x based on budgeted 2022 EBITDA, which could lead to deleveraging for Pure Fishing if the budget is realized.
“Pure Fishing’s retail concentration makes it vulnerable to potential inventory corrections. The company participates in the highly fragmented and competitive market for fishing equipment, which could be subject to mismatches between supply and demand. Pure Fishing has faced significant operational challenges over the past few years, which resulted in lower year-over-year revenue from 2017 to 2019. We believe these declines are in part a result of corrections to retailer inventory, particularly following the merger of Bass Pro Shops and Cabela’s. Further disruptions in the Company’s concentrated retailer base could lead to further volatility in the Company’s low revenues and cash flow, as the inventory policy and purchasing decisions of its largest customers may have a significant effect on company revenue. We believe this revenue volatility is demonstrated by the company’s year-over-year revenue decline from 2017 to 2019, which was partly the result of inventory corrections at some of its largest retailers. The company’s declining revenue could also indicate market share losses to larger competitors such as Daiwa, Shimano and Rapala, as we believe competitors’ revenue may not have declined over the same period. 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 costs and liquidity will likely be adequate, which mitigates the risk of a downgrade. over the next 12 months.”
“We could revise our outlook to negative or downgrade our ratings on Pure Fishing if we believe revenue and EBITDA would significantly underperform our base case. We could also downgrade the rating if operating cash flow is weak. and lead to a prolonged and increased dependence on ABL, which strains the company’s liquidity.
“We could revise the outlook to positive or raise the ratings if we become confident that the company could maintain a level of revenue and EBITDA or reduce debt in a way that could result in lease-adjusted debt versus EBITDA less than 7x.”
Photo courtesy of Pure Fishing