Pure Fishing extends loan commitments to support Svendsen acquisition

Pure Fishing increased its commitment to the ABL revolver to $ 250 million, issued an additional $ 100 million first-loan guarantee and a $ 25 million second-loan loan, and used the proceeds to buy Svendsen Sport A / S, a European pro fishing equipment and consumables.

The moves are described in detail in a rating update from S&P Global Ratings.

S&P said the transaction demonstrates Pure Fishing’s risk of making additional debt acquisitions, while macroeconomic risks remain high. The rating agency said Pure Fishing leverage is likely to remain very high at least until 2022 due to higher debt and short-term demand for the company’s fishery and leisure products could be mitigated.

S&P has confirmed the creditworthiness of the “CCC +” issuer in Pure Fishing despite the very high leverage, because the liquidity remains sufficient. S&P’s “CCC +” rating for the company’s first guarantee debt was also confirmed. At the same time, S&P revised its ‘4’ to ‘3’ recovery rating to reflect the significant growth debt for the acquisition of Svendsen, which S&P believes is reducing the prospects for first-time lenders.

The firm outlook reflects S&P’s belief that Pure Fishing can moderately reduce its very high leverage in the coming quarters, EBITDA will be able to cover fixed charges and liquidity will probably be sufficient, which mitigates the possibility of downgrading in the next 12 months.

S&P said in its analysis, “Our up-to-date forecast is that the company’s adjusted gross debt to EBITDA will be in the range of 7.5x-9.25x in 2022, and this could be unsustainable if there is unexpected volatility in demand. fishing equipment or unintentional operating errors. the next two years. We assumed that demand could increase 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 hit harder than our core business by macroeconomic risks and supply chain disruptions because the company’s sales activities are global. For example, an escalation of the Russia-Ukraine conflict could lead to disruptions in energy supply or price shocks. Prolonged inflationary pressures or the slowdown in economic growth following possible policy mistakes by central banks could also erode profits. COVID-19 reduction measures in Asia, which supplies about 40% of Pure Fishing resale products, pose an additional macroeconomic risk and could cause supply shocks that slow the recovery of the pro forma EBITDA margin compared to 2021 Supply chain disruptions, including stock constraints in Asia that drive up unit prices, could expose the company to more negative working capital uses than budgeted for the year and could increase liquidity risk. We predict that Pure Fishing operating cash flows will be modest in 2022 after negative operating cash flows in 2021 and any weakness in operating results would be more dependent on ABL. Our main assumption is that Pure Fishing will receive more than 40% of its ABL commitments by the end of 2022, in part due to the acquisition of Svendsen.

The rating also reflects Pure Fishing’s desire to participate in debt-financed acquisitions, particularly of Plano in 2021 and Svendsen in early 2022. Svendsen’s purchase price was $ 153.4 million, with the possibility of increased profit payments 22, $ 5 million by mid-2022. These recent acquisitions introduce integration risks that could pose high leverage and financial risk.

“Despite the high financial risk, the outlook is stable because we anticipate that Pure Fishing will have sufficient liquidity and adequate fixed charge coverage, mitigating the likelihood of downgrade. The company had approximately $ 39 million in cash as at 31 December 2021. Incorporating ABL capacity remaining after the acquisition of Svendsen, we estimate total liquidity at the end of March 2022 at approximately $ 105 million, which is sufficient based on our forecast for cash uses over the next 12-24 months. The liquidity profile leads us to believe that a short-term bankruptcy is unlikely, in part because the company’s next debt maturity is in 2025.

“Furthermore, if the organic results of Svendsen and Pure Fishing exceed our basic forecasts, which is possible as long as supply chain disruptions subside, the capital structure could be sustainable. We understand that Svendsen is a leading provider of fishery products in Europe with a relatively high combination of sales of consumables, which tend to have a higher profit margin than the permanent ones. Therefore, Svendsen could increase the EBITDA margin of the consolidated entity on a pro forma basis. Multiply Svendsen purchases (including payout) is about 6 times the 2022 budget EBITDA, which could be a leverage for Pure Fishing if the budget is implemented.

“The concentration of the Pure Fishing retailer makes it vulnerable to possible stock 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 operational challenges in recent years, resulting in year-over-year revenue reductions from 2017 to 2019. We believe these reductions were due in part to retailers’ stock adjustments, particularly after the merger of Bass Pro Shops and of Cabela’s. Additional disruptions to the company’s concentrated retail base could lead to further instability in the company’s low-income and cash flow bases, as inventory policy and purchasing decisions by its largest customers can have a significant impact on the company’s revenue. We believe that this revenue volatility is evidenced by the company’s revenue reductions on an annual basis from 2017 to 2019 which were partly the result of stock adjustments to some of its largest retailers. The decline in the company’s revenue could also be indicative of the loss of market share in major competitors such as Daiwa, Shimano and Rapala, as we believe that competitors’ revenue may not have declined over the same period.

“The firm outlook reflects our belief that Pure Fishing can moderately reduce its very high leverage in the coming quarters, EBITDA will be able to cover fixed charges and liquidity will probably be sufficient, which mitigates the likelihood of downgrading over the next 12 months. months .”

“We could reconsider our prospects of denying or lowering our Pure Fishing ratings if we thought revenue and EBITDA would be significantly underperforming. We could also reduce the assessment of whether operating cash flows are weak and lead to prolonged and increased dependence on ABL, thus burdening the company’s liquidity.

“We could revise the outlook to positive or increase the ratings if we were confident that the company could maintain a level of revenue and EBITDA or reduce its debt in a way that could lead to adjusted EBITDA debt below 7x ยป.

Photo courtesy of Pure Fishing

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