(The following statement was released by the rating agency) Overview
-- Englewood, Colo.-based The Sports Authority is issuing a $630 million term loan B due in 2019.
-- We are assigning our 'B-' issue-level rating to the term loan, with a recovery rating of '4'.
-- We are also affirming our 'B-' corporate credit rating on the company.
-- The stable outlook reflects our expectation that performance and credit measures will improve modestly over the next 12 months, but that the company's financial risk profile will remain highly leveraged, with thin cash flow protection measures.
Rating Action As Standard & Poor's Ratings Services previously announced on Nov. 2, 2012, we assigned our 'B-' issue-level rating to The Sports Authority Inc. and co-borrower TSA Stores Inc.'s (TSA) $630 million senior secured term loan B, with a recovery rating of '4', indicating our expectation for average (30% to 50%) recovery of principal if a payment default occurs.
The company expects the loan to mature in 2019 and that it will use proceeds to repay its existing term loan B and its senior subordinated notes. At the same time, we affirmed our ratings on TSA, including our 'B-' corporate credit rating. The rating outlook is stable.
The ratings on sporting goods retailer TSA reflect Standard & Poor's Ratings Services' assessment that the company's business risk profile will continue to be "vulnerable" and its financial risk profile will remain "highly leveraged." Our business risk assessment reflects our analysis that the retail sporting goods industry will continue to be highly competitive and fragmented, and that it will be difficult for TSA to improve its market share.
Competitors include traditional sporting goods stores (Academy Sports & Outdoors, Hibbett Sports, and Big 5 Corp.), specialty retailers and department stores (Foot Locker Inc. and Macy's Inc.), mass merchants (Wal-Mart Stores Inc. and Target Corp.), and catalog and Internet retailers (Amazon.com).
Although business conditions remain competitive and the economy remains stagnant, we believe that TSA's performance will rebound modestly after a difficult 2011 fourth quarter. We base this on benefits we expect from supply chain initiatives, a better focus on merchandise improvements, and fewer price markdowns. These efforts could result in improved margins over the next year.
Specifically, our forecast for 2013 includes the following assumptions:
-- Flat to slightly negative sales per square foot.
-- Modest growth in total square feet.
-- Margin increases based on fewer markdowns and lower operating expenses.
-- Moderate inventory reduction through supply chain enhancements.
-- More capital spending to support store growth.
-- Modestly positive free operating cash flow.
Credit protection measures deteriorated over the past year because of a lower EBITDA, but we expect this trend to reverse in the coming year. In our view, the company should benefit from operational gains coupled with relatively flat debt levels. We believe leverage will fall to about 7.0x over the next 12 months compared with 7.5x on July 28, 2012. We anticipate interest coverage will improve to the mid-to-high 1.0x area, mainly due to refinancing higher interest rate debt. We also expect funds from operations (FFO) to total debt to approach 14% over the next 12 months.
Liquidity remains "adequate" for the company, as we expect sources of cash to exceed uses of cash over the next 12 months. Sources of cash include availability under the company's $650 million revolving credit facility, FFO, and cash on hand. Cash uses include debt amortization, capital spending, and a modest investment in working capital. Other relevant aspects of our analysis include:
-- We estimate coverage of sources over uses of above 1.2x over the next 12 months.
-- We expect net sources to be positive, even with a 20% decline in EBITDA.
-- There are no financial performance covenants unless availability is less than 10% of the borrowing base.
-- There are no meaningful debt maturities over the near term.
The stable outlook reflects our expectations that performance and credit measures will improve modestly over the next 12 months, but that the company's financial risk profile will remain highly leveraged with thin cash flow protection measures. As a result of the refinancing, the company's funded debt amounts will not change, but we expect interest costs and cash flow measures to improve modestly over the next year because of the lower interest rate.
Although we think a lower rating is unlikely over the near term, it could occur if liquidity deteriorates such that TSA's ability to fund ongoing operations from availability under its revolving credit facility is at risk. A violation of the springing financial performance covenants could also cause a downgrade.
We could contemplate raising the ratings if TSA performs above our expectations, and achieves leverage below 6.0x and interest coverage approaching the low-2.0x area. In this scenario, EBITDA would be about 20% higher than our projections over the next year. However, given TSA's forecast credit measures, we are not expecting to raise our ratings over the next 12 months.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Analytical Methodology, April 15, 2008
-- Ratios And Adjustments, April 15, 2008
Ratings List Ratings Affirmed The Sports Authority Inc. Corp credit rating B-/Stable Senior secured B- Recovery rating 3 New Rating The Sports Authority Inc. $630 mil term loan B B- Recovery rating 4
Temporary telephone contact numbers: Kristina Koltunicki (646-276-0214); Jayne Ross (973-735-3761)
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