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Rating Action:

Moody's changes Weight Watchers' outlook to negative; affirms Ba3 CFR and debt ratings

20 Mar 2019

Nearly $2.0 billion of rated debt affected

New York, March 20, 2019 -- Moody's Investors Service ("Moody's") revised Weight Watchers International, Inc.'s ("Weight Watchers") outlook to negative, from stable, given expectations for marked revenue and earnings declines in 2019. Moody's affirmed Weight Watchers' Ba3 Corporate Family Rating ("CFR"), its Ba3-PD Probability of Default rating ("PDR"), Ba2 senior secured credit facility ratings, and B2 senior unsecured notes rating. Moody's also affirmed the company's Speculative Grade Liquidity rating of SGL-1.

RATINGS RATIONALE

Moody's is changing Weight Watchers' outlook to negative given weak growth in subscribers during the company's crucial early-year subscriber recruitment period and an unfavorable mix of digital and digital-plus-studio subscribers relative to a very strong early-2018 subscriber cohort. As a result, revenues are expected to decline by at least mid-single-digit percentages in 2019. And although the company has a high variable cost structure, ongoing heavy levels of investments in digital and other technology capabilities will mean that earnings declines will likely outpace the revenue decline. Weight Watchers' avowed success with its recent marketing shift towards a holistic, wellness-focused identity appears to have come at the expense of customers' commitment to the important face-to-face "studio" meetings. There is speculation, too, that the company's critical January-February marketing season has been hurt by the nascent keto diet. The early-2019 subscriber cohort is, Moody's believes, weighted more towards solely digital subscribers instead of digital-plus-studio subscribers, the latter which, because they purchase Weight Watchers ancillary products, are an important revenue driver.

Moody's anticipates that Weight Watchers' Moody's-adjusted debt-to-EBITDA leverage will rise to at least 5.5 times by the end of 2019, after having steadily declined in recent years, to as low as 4.1 times at the end of 2018. While liquidity will be diminished, the company will likely continue to generate enough free cash flow to enable it to prepay debt. And while there will be no change to its deleveraging goals, they will probably be prolonged, as will its 2020 goal of $2 billion in revenues. Weight Watchers has a history of boom and bust cycles. It has faced technological and diet trends repeatedly in the past. But Moody's expects that its very recent redoubling of its efforts to clarify its marketing will enable it to regain the important customer profile it has lost, and 2019 will have proven to be only a cyclically disappointing year.

The Ba3 CFR reflects Weight Watchers' market leading scale and brand recognition, as well as its history of subscriber volatility. The weight management services industry is competitive and Moody's anticipates consumer preferences will continue to evolve. Moody's remains concerned that competition for weight loss service customers, especially for so-called "trial" members who are most likely to follow the newest trends or promotions, could make operating and financial improvements difficult to sustain.

The SGL-1 rating reflects Weight Watchers' very good liquidity profile. Weight Watchers had cash balances of nearly $240 million at December 31, 2018. Moody's expects free cash flow of approximately $75 million in 2019, down from almost $250 million in 2018. The company will have $77 million of annual term loan amortization in 2019 and anticipates using cash to pay down more than the required amount. The fully available $150 million senior secured revolver is subject to a financial covenant requiring first lien leverage (as defined in the facility agreement) of no more than 5 times, but only if at least $50 million is outstanding on the quarter end test date. Moody's does not expect the covenant to be measured, although there would likely be modest cushion were it to be measured.

The ratings could be upgraded if Moody's expects: 1) sustained revenue growth; 2) debt to EBITDA will remain below 3.5 times; and 3) a commitment to balanced financial policies.

A ratings downgrade is possible if Moody's anticipates that 2019's revenue shortfall, elevated leverage, and diminished free cash flow will persist into 2020.

Issuer: Weight Watchers International, Inc.

Ratings affirmed:

....Corporate Family Rating, affirmed Ba3

....Probability of Default Rating, affirmed Ba3-PD

....Senior Secured Bank Credit Facility, affirmed Ba2 (LGD3)

....Senior Unsecured Notes, affirmed B2 (LGD6)

....Speculative Grade Liquidity Rating, affirmed SGL-1

Outlook:

....Outlook, revised to negative, from stable

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Weight Watchers is a provider of weight management services. Moody's expects 2019 revenues of $1.4 billion, a roughly 8% decline from 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kevin Stuebe
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Karen Nickerson
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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