(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) fromCollective Brands Inc.
-- We are assigning Wolverine our 'BB-' corporate credit rating followingthe completion of the transaction in line with our expectations.
-- The stable outlook reflects our view that Wolverine should performresiliently over the next 12 months, while gradually reducing adjustedleverage.
Rating ActionOn Oct. 11, 2012, Standard & Poor's Ratings Services assigned Wolverine WorldWide Inc. its 'BB-' corporate credit rating. The outlook is stable.
At the same time, we assigned Wolverine's $1.1 billion senior secured creditfacility our 'BB' issue-level rating (one notch above the corporate creditrating) with a recovery rating of '2', indicating our expectation forsubstantial (70% to 90%) recovery for the lenders in the event of a paymentdefault. We also assigned Wolverine's $375 million unsecured notes due 2020our 'B+' issue-level rating (one notch below the corporate credit rating) witha 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 profileis "aggressive" given the higher debt levels following completion of the PLGacquisition resulting in pro forma debt-to-EBITDA leverage in excess of 4.5x.In addition, we believe the company's financial policy is moderate, reflectingthe company post transaction leverage in conjunction with management's plansto reduce transaction-related debt and that the company has operated with verymodest debt levels in recent years. Our ratings further reflect our view ofWolverine's "fair" business risk, underpinned by the group's strong nichepositions in the U.S. footwear market, and the strength and growth potentialof most of its brands. The business risk assessment is constrained by our viewof the fragmented and competitive market in which Wolverine operates, as wellas by its limited geographic diversification and narrow product offering.
The company will have high debt levels after the transaction, with pro formaadjusted debt leverage initially about 4.6x. We believe this should graduallydecline toward 4x within the next 12 to 18 months, while the ratio of fundsfrom operations (FFO) to debt should improve to the high teens. As such, webelieve credit measures are in line with indicative ratios for a financialrisk profile that we characterize to be aggressive. These credit measuresinclude debt-to-EBITDA leverage of 4x to 5x and FFO to total debt of 12% to20%.
Our base-case scenario incorporates the following assumptions:
-- Organic revenue growth in the mid-single-digit area over the next 12to 18 months, supported by new store openings, geographic expansion outsidethe U.S. market, and higher selling prices.
-- Combined EBITDA margins will decline to the 14% area from Wolverine'shistorical over-15% EBITDA margin. We believe that modest input cost inflationwill be largely offset by higher volume, favorable price/mix, and operatingefficiency gains. We anticipate that synergies resulting from the PLGacquisition will be minimal in 2012 and 2013 since the two entities will berun fairly independently over the next 18 months, according to management.
-- We estimate capital expenditures of about $40 million for the nextyear.
-- We assume a policy maintaining a dividend payment in the $20 millionto $25 million range, and no share repurchase or acquisition activity for thenext roughly 18 months. We expect the company to use internally generated cashto reduce debt.
However, we remain cautious in view of future deleveraging, given our view ofthe execution risks related to the transaction. This is the largest companythat Wolverine has acquired and it has never acquired several brands at once.We also believe the company could have difficulty merging the cultures of thetwo companies.
Still, we believe the PLG business will enhance Wolverine's scale and marketposition, 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 willremain narrowly focused in the highly competitive casual footwear sector, webelieve the PLG brands will complement Wolverine's portfolio of well-knownbrands. Also, greater diversification by brand will reduce the company'sreliance on its largest brand (Merrell) to less than 25% of combined revenues.Geographic diversification will remain somewhat limited, with less than 25% ofcombined sales generated outside of North America.
We view Wolverine's liquidity as "adequate," with sources of cash that arelikely to exceed uses for the next 12 months. Our assessment of Wolverine'sliquidity incorporates the following expectations, assumptions, and factors:
-- We forecast sources of liquidity to exceed uses of liquidity by morethan 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 facilitymaturing in 2017 (undrawn upon completion of the transaction).
-- We estimate funds from operations for 2013 to be in the $200 millionarea.
-- We expect covenants under the credit facility to have adequateheadroom with 20% to 25% cushion.
-- The company has no debt maturities until 2017.
Recovery analysisThe issue-level rating on Wolverine's senior secured credit facility is 'BB',one notch above the corporate credit rating on the group. The recovery ratingon the facility is '2', reflecting our expectation for substantial (70% to90%) recovery for the lenders in the event of a payment default. Theissue-level rating on Wolverine's $375 million unsecured notes due 2020 is'B+', one notch below the corporate credit rating. The recovery rating on thefacility is '5', reflecting our expectation for modest (10% to 30%) recoveryfor the lenders in the event of a payment default.
(For the complete recovery analysis, please see Standard & Poor's recoveryreport on Wolverine World Wide Inc., to be published on RatingsDirectfollowing the publication of this report.)
The stable outlook reflects our view that Wolverine should perform resilientlyover the next 12 months, maintaining its strong niche positions in the U.S.footwear market, and expanding its operations internationally following theacquisition of PLG. We believe the company will use internally generated cashto 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 (possiblyfrom lower-than-anticipated volume growth and profit margins declining by over200 basis points), or if there is a meaningful integration stumble,particularly given the large size of the transaction, we could lower theratings.
Conversely, if we believe leverage is sustainable in the 3.5x area and FFO todebt increases to over 20% (which would be commensurate with a "significant"financial risk profile), we could raise the rating. This could result fromstronger-than-anticipated geographic expansion, and the faster-than-expectedachievement of synergies, leading to at least 100 basis points of improvementin 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-GradeCredits, 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 ListNew RatingWolverine World Wide Inc.Corporate Credit Rating BB-/Stable/--$1.1B sr secd credit facility BBRecovery Rating 2$375M unsecd notes due 2020 B+Recovery Rating 5
(Caryn Trokie, New York Ratings Unit)