Wahoo Fitness’s debt ratings have been lowered by Moody’s and S&P Global Ratings due to weaker-than-expected demand and intense price competition in the home fitness space.
Moody’s lowered its rating to Wahoo Fitness Acquisition LLC, including the company’s family rating (CFR) to B3 from B2, its default probability rating (PDR) to B3-PD from B2-PD, and rating on the Company’s First Guaranteed Credit Facility to B3 from B2. The first mortgage credit facility consists of a $30 million first mortgage revolver due in 2026, and a $225 million original first mortgage loan due in 2028. The outlook is negative.
Moody’s wrote: “Today’s rating downgrade and negative outlook reflect Moody’s expectation that Wahoo’s debt/EBITDA will increase materially in fiscal 2022 and that liquidity is constrained by lower revenue and earnings than Moody’s previous forecast. Wahoo delivered strong YoY revenue growth of 38% In fiscal year 2021 driven by strong consumer demand for the company’s products.However, Moody’s believes that earnings in 2021 have been boosted by pandemic-driven demand for home fitness products and rising channel stocks, so this profit level does not appear to be sustainable.Wahoo is experiencing a decline in sales of its coaching products during the beginning of fiscal year 2022. The sales weakness is attributed to lower channel inventory due to higher levels of retail coach stock at the end of 2021, and a significant discount to competitive products, such as a return to more regular seasonality compared to large, non-seasonal sales in First quarter of 2021. As a result, Moody’s expects Wahoo’s revenue to decline in percentage terms to its mid-teens and a significant decline in the Before interest, taxes, depreciation, and amortization, about 45 percent of the public finances. 2022. Wahoo’s debt/EBITDA leverage is expected to increase to 5.5x in FY 2022, up from 3.1x at the end of FY2021. Moody’s expects debt/EBITDA leverage to be significantly higher during the second and third quarter periods of 2022, due to seasonality of work.
“Wahoo’s liquidity will be constrained over the next 12 months by Moody’s forecast of negative free cash flow of around $30-35 million and heavy reliance on the $30 million revolver facility. Free cash flow will be pressured by significant investment in working capital, primarily in stock to support new product launches and upgrades in 2022. Moody’s projects Wahoo will rely on revolver loans for the next few quarters to fund investments in inventory.Given the expected decline in profitability, Moody’s anticipates that the company will not comply with the first financial maintenance agreement of the maximum leverage credit facility. net gross financials of 5.0x, particularly during the second and third quarters before the winter selling season.To address limited liquidity, Wahoo announced a proposed amendment to the first credit facility that would waive the financial maintenance charter during the third quarter of fiscal 2022 and replace it with a minimum covenant. for $5 million liquidity.Starting in the fourth quarter of 2022, Covenant will be retested at 7x, waiving to 5.5x In the first quarter of 2023, then finally ceding to 5.0x in the fourth quarter of 2023 and beyond. Moody’s believes that the proposed amendment will ease concerns about Wahoo’s compliance with the covenant and provide some financial flexibility over the next 12 months. In addition, the company has received approximately $12 million in equity co-investment from the new board member which is expected to provide cash flow in the near term.
Wahoo has a good track record of successful new product launches and expects a significant contribution to sales and profits from several new and revamped products in late 2022. However, there is uncertainty about the sustainability of consumer demand for the company’s products. Demand could decline or turn negative as persistent inflationary pressures begin to erode consumers’ purchasing power, and with consumers shifting spending back into categories that have been limited over the past few years such as travel. There is also uncertainty regarding macroeconomic conditions, particularly in Europe, the company’s largest market, and ongoing supply chain challenges may also put pressure on profitability if the company is unable to mitigate cost inflation.”
S&P lowered the issuer’s credit rating on Wahoo to “B-” from “B”. At the same time, it lowered its issue-level rating on the secured credit facility to “B” from “B+”. The payback rating remains “2”, indicating its expectations of a significant recovery (70 percent – 90 percent; rounded estimate: 70 percent) in the event of a default.
The negative outlook reflects the possibility of a lower rating within the next year.
Standard & Poor’s wrote in its analysis, “The rating downgrade reflects weak operating conditions and our expectation of a material decline in the company’s earnings in 2022, which will weaken credit metrics. Wahoo’s revenue increased significantly in the first half of fiscal 2021, driven by strong demand from end customers to Besides the tight supply chain conditions at the end of 2020. Thus its channel partners entered into 2021 with much less inventory on hand.However, customer demand from end users fell well below expectations in the second half of 2021, resulting in an increase Channel stock by the end of the year. In addition, the company faces stiff competition from major competitors such as Garmin and, to a lesser extent, Peloton, who are engaged in aggressive promotional activity to sell excess Channel stock. We understand that Wahoo has not participated in such promotions as it expects that These discounts are temporary and have better brand equity to maintain higher prices.
Further, the company is vulnerable to economic cycles due to the discretionary nature of its products. We recognize the unique nature of Wahoo’s loyal customer base and anticipate that in the event of an economic downturn, many will reduce discretionary spending in other areas before reducing cycling-related purchases. However, we believe that a large segment of customers will delay purchasing product upgrades in an environment of recession and/or inflation that is more likely.
“Therefore, we expect revenue to fall by about 20 percent and global ratings-adjusted earnings by 30 percent in FY 2022, resulting in a leverage of about 5.5 times. Stable sales and earnings are likely at this time. The levels are sufficient to maintain the rating.However, we note the risk that a portion of the high demand in early 2021 may shift to one off, with significant uncertainty remaining as to where natural demand for indoor bike trainers and accessories will settle in the wake of the COVID pandemic. -19.
“Driven by weak industry dynamics and the highly seasonal nature of the business, Wahoo is at risk of violating the quarterly net financial leverage charter and has launched an amendment to its credit agreement, including a waiver of the covenant and a tightening of restricted payments. The company’s sales are typically concentrated in the back half of year (about 65 percent of total revenue), which coincides with the colder months in the Northern Hemisphere and the holiday season.However, Wahoo reported unreasonably weak second-half in fiscal 2021 and expects seasonal weakness in the first half of fiscal 2022 This would result in poor EBITDA over the past 12 months and a breach of the covenant if not waived or mitigated. We expect the Company to obtain a charter waiver from its lending group. However, it is important to note that Wahoo believes that demand The point-of-sale of its products is still going strong (some large retail partners have reported double-doubling in sales growth in the first two months of 2022) and that their sales should rebound after oversupply in the channel is resolved.
“We expect Wahoo’s margins to shrink during FY 2022 due to cost inflation. The company faces rising commodity prices and shipping costs. We understand that Wahoo is evaluating price changes to offset rising costs. However, this may be insufficient to take into account an increasingly inflationary environment. We expect to remain Margins are under pressure for next year.
The negative outlook on Wahoo reflects ongoing operational hurdles related to weaker-than-expected demand, intense price competition, and increased cost pressures. If the company’s liquidity and cash flow position further deteriorates in 2022, this could add significant uncertainty to its ability to maintain a sustainable capital structure.”
Photo courtesy of Wahoo Fitness
