(The following statement was released by the rating agency) Overview
-- U.S.-based footwear company Wolverine World Wide Inc.
completed its acquisition of Performance and Lifestyle Group (PLG) from Collective Brands Inc.
-- We are assigning Wolverine our 'BB-' corporate credit rating following the completion of the transaction in line with our expectations.
-- The stable outlook reflects our view that Wolverine should perform resiliently over the next 12 months, while gradually reducing adjusted leverage.
Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services assigned Wolverine World Wide Inc. its 'BB-' corporate credit rating. The outlook is stable.
At the same time, we assigned Wolverine's $1.1 billion senior secured credit facility our 'BB' issue-level rating (one notch above the corporate credit rating) with a recovery rating of '2', indicating our expectation for substantial (70% to 90%) recovery for the lenders in the event of a payment default. We also assigned Wolverine's $375 million unsecured notes due 2020 our 'B+' issue-level rating (one notch below the corporate credit rating) with a recovery rating of '5', indicating our expectation for modest (10% to 30%) recovery for lenders in the event of a payment default.
Our ratings on Wolverine reflect our view that the company's financial profile is "aggressive" given the higher debt levels following completion of the PLG acquisition resulting in pro forma debt-to-EBITDA leverage in excess of 4.5x. In addition, we believe the company's financial policy is moderate, reflecting the company post transaction leverage in conjunction with management's plans to reduce transaction-related debt and that the company has operated with very modest debt levels in recent years. Our ratings further reflect our view of Wolverine's "fair" business risk, underpinned by the group's strong niche positions in the U.S. footwear market, and the strength and growth potential of most of its brands. The business risk assessment is constrained by our view of the fragmented and competitive market in which Wolverine operates, as well as by its limited geographic diversification and narrow product offering.
The company will have high debt levels after the transaction, with pro forma adjusted debt leverage initially about 4.6x. We believe this should gradually decline toward 4x within the next 12 to 18 months, while the ratio of funds from operations (FFO) to debt should improve to the high teens. As such, we believe credit measures are in line with indicative ratios for a financial risk profile that we characterize to be aggressive. These credit measures include debt-to-EBITDA leverage of 4x to 5x and FFO to total debt of 12% to 20%.
Our base-case scenario incorporates the following assumptions:
-- Organic revenue growth in the mid-single-digit area over the next 12 to 18 months, supported by new store openings, geographic expansion outside the U.S. market, and higher selling prices.
-- Combined EBITDA margins will decline to the 14% area from Wolverine's historical over-15% EBITDA margin. We believe that modest input cost inflation will be largely offset by higher volume, favorable price/mix, and operating efficiency gains. We anticipate that synergies resulting from the PLG acquisition will be minimal in 2012 and 2013 since the two entities will be run fairly independently over the next 18 months, according to management.
-- We estimate capital expenditures of about $40 million for the next year.
-- We assume a policy maintaining a dividend payment in the $20 million to $25 million range, and no share repurchase or acquisition activity for the next roughly 18 months. We expect the company to use internally generated cash to reduce debt.
However, we remain cautious in view of future deleveraging, given our view of the execution risks related to the transaction. This is the largest company that Wolverine has acquired and it has never acquired several brands at once. We also believe the company could have difficulty merging the cultures of the two companies.
Still, we believe the PLG business will enhance Wolverine's scale and market position, with combined sales of more than $2.5 billion, up significantly from $1.4 billion for the 12 months ended June 30, 2012. While the business will remain narrowly focused in the highly competitive casual footwear sector, we believe the PLG brands will complement Wolverine's portfolio of well-known brands. Also, greater diversification by brand will reduce the company's reliance on its largest brand (Merrell) to less than 25% of combined revenues. Geographic diversification will remain somewhat limited, with less than 25% of combined sales generated outside of North America.
We view Wolverine's liquidity as "adequate," with sources of cash that are likely to exceed uses for the next 12 months. Our assessment of Wolverine's liquidity incorporates the following expectations, assumptions, and factors:
-- We forecast sources of liquidity to exceed uses of liquidity by more than 1.2x over the next 12 months.
-- We estimate net sources would be positive even if EBITDA fell 15%.
-- Wolverine has a $200 million five-year revolving credit facility maturing in 2017 (undrawn upon completion of the transaction).
-- We estimate funds from operations for 2013 to be in the $200 million area.
-- We expect covenants under the credit facility to have adequate headroom with 20% to 25% cushion.
-- The company has no debt maturities until 2017.
Recovery analysis The issue-level rating on Wolverine's senior secured credit facility is 'BB', one notch above the corporate credit rating on the group. The recovery rating on the facility is '2', reflecting our expectation for substantial (70% to 90%) recovery for the lenders in the event of a payment default. The issue-level rating on Wolverine's $375 million unsecured notes due 2020 is 'B+', one notch below the corporate credit rating. The recovery rating on the facility is '5', reflecting our expectation for modest (10% to 30%) recovery for the lenders in the event of a payment default.
(For the complete recovery analysis, please see Standard & Poor's recovery report on Wolverine World Wide Inc., to be published on RatingsDirect following the publication of this report.)
The stable outlook reflects our view that Wolverine should perform resiliently over the next 12 months, maintaining its strong niche positions in the U.S. footwear market, and expanding its operations internationally following the acquisition of PLG. We believe the company will use internally generated cash to reduce its debt-to-EBITDA leverage to 4x over the next 12 to 18 months.
If debt leverage were to increase to over 5x on a sustained basis (possibly from lower-than-anticipated volume growth and profit margins declining by over 200 basis points), or if there is a meaningful integration stumble, particularly given the large size of the transaction, we could lower the ratings.
Conversely, if we believe leverage is sustainable in the 3.5x area and FFO to debt increases to over 20% (which would be commensurate with a "significant" financial risk profile), we could raise the rating. This could result from stronger-than-anticipated geographic expansion, and the faster-than-expected achievement of synergies, leading to at least 100 basis points of improvement in margins versus our base case.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List New Rating Wolverine World Wide Inc. Corporate Credit Rating BB-/Stable/-- $1.1B sr secd credit facility BB Recovery Rating 2 $375M unsecd notes due 2020 B+ Recovery Rating 5
(Caryn Trokie, New York Ratings Unit)