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Rating Action:

Moody's downgrades Amer Sports' CFR to B3 from B1; negative outlook

31 Mar 2020

Madrid, March 31, 2020 -- Moody's Investors Service ("Moody's") has today downgraded to B3 from B1 the corporate family rating (CFR) of Finland-based sporting goods company Amer Sports Holding 1 Oy ("Amer Sports" or "the company"). Concurrently, Moody's has downgraded to B3-PD from B1-PD the company's probability of default rating (PDR), and to B3 from B1 the ratings on the €1,700 million term loan B and the €315 million revolving credit facility (RCF), both borrowed by Amer Sports' subsidiary Amer Sports Holding Oy. The outlook has been changed to negative from stable for both entities.

"The downgrade to B3 reflects the severe and protracted adverse impact that the coronavirus outbreak will have on Amer Sports' sales and earnings in 2020, resulting in a sharp spike in its already elevated leverage," says Igor Kartavov, a Moody's lead analyst for Amer Sports. "Weakening cash flow generation creates imminent risks for the company's liquidity, including a likely breach of its maintenance covenant and a possible cash shortfall in the second and third quarters of 2020," adds Mr. Kartavov.

A full list of affected ratings is provided towards the end of the press release.

RATINGS RATIONALE

The downgrade of Amer Sports' ratings reflects the detrimental impact that the worldwide spread of the coronavirus outbreak, particularly across Europe and North America, is having and will continue to have on the company's business in 2020. Amer Sports' products are highly discretionary for consumers, and demand for them is linked to a variety of travelling and sports activities, which are currently restricted in many of the company's key markets due to the social distancing measures imposed by governments in response to the coronavirus. Moreover, over 80% of the company's products are distributed via offline channels, including sporting goods chains, specialty retailers, fitness clubs and own branded stores, most of which have been temporarily shut down.

The impact of the growing spread of coronavirus on Amer Sports' financial and operating results is currently difficult to estimate because of the significant pace of negative developments, which creates uncertainty regarding the duration and severity of containment measures adopted by various countries.

Moody's base case incorporates the assumption that the company's revenue in 2020 will decline by over 20% year-on-year. Although the company is implementing a comprehensive set of measures to reduce operating costs in response to the deteriorated operating environment, it will be challenging for the company to fully offset the sharp decline in revenue in 2020. As a result, Moody's expects that Amer Sports' leverage, measured by Moody's-adjusted gross debt to EBITDA ratio, will exceed 10x in 2020, up from an already high level of 7.9x estimated by the rating agency for 2019. This increase in leverage mainly results from an abrupt drop in EBITDA, which Moody's estimates at around 40% year-on-year, assuming a gradual recovery in sales and earnings in the second half of the year, which normally accounts for 60% of Amer Sports' annual revenue and 80% of its EBITDA.

Amer Sports' B3 CFR factors in (1) the company's aggressive capital structure and very high leverage of 7.9x in 2019, expected to peak at double-digit values in 2020; (2) uncertainty related to the pace of recovery in the company's performance after the coronavirus outbreak is tamed, because of the highly discretionary nature of its products; (3) weak liquidity, exacerbated by significant seasonality of earnings and net working capital, and a likely covenant breach in 2020; and (4) significant capital spending and marketing expenses required to implement expansion in China, which put pressure on margins and free cash flow.

The company's rating continues to incorporate (1) its leading market positions supported by a large and diversified portfolio of globally recognised brands, and its large scale; (2) its broad diversification across sports segments and geographies; (3) favorable long-term demand dynamics in the outdoor and sports market, with additional growth potential from expansion into the direct-to-consumer channel of the Chinese outdoor apparel market; and (4) strategic guidance and potential financial support from ANTA Sports.

LIQUIDITY

The deterioration in earnings in 2020 creates imminent risks for the company's liquidity. As of 31 December 2019, Amer Sports had €306 million of cash and €119 million available under the RCF. However, the company has to repay around €167 million of legacy bank loans in the first half of 2020. In addition, part of the consolidated cash is held at the level of operating subsidiaries based in emerging markets, and may not be immediately available for general corporate purposes. The company's business is highly seasonal, with negative EBITDA and operating cash flow typically generated in the second quarter of the year. Moody's expects that the large negative cash flow in the second quarter of 2020, exacerbated by implications of the coronavirus outbreak, will require Amer Sports to fully draw down its RCF and will significantly erode its cash cushion. Moody's also notes the high uncertainty related to the company's net working capital evolution, particularly with respect to accumulation of unsold inventories and accounts receivable from distributors. Amer Sports faces significant net working capital seasonality, with large outflows in the third quarter of the year, which will put further stress on its liquidity.

The company's RCF contains a maintenance covenant of senior secured net leverage not exceeding 8.0x, tested when the facility is over 40% utilised. Moody's expects that Amer Sports' leverage will exceed this threshold as of 30 June or 30 September 2020. While the covenant breach can be remedied via a waiver or an equity cure, the company has not made any such arrangements so far.

Amer Sports is owned by a consortium led by Chinese sportswear company ANTA Sports Products Limited (ANTA Sports). Given the size and strategic importance of this investment for ANTA Sports, as well as its strong financial position, Moody's considers it likely that the shareholders may provide financial support to Amer Sports in case of extraordinary liquidity pressure. Moody's understands that Amer Sports has already reached an agreement not to make a €11.5 million dividend payment in March 2020 to service the interest on a loan raised outside of the restricted group. However, any further support from the shareholders remains uncertain at this stage.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The consumer durables sector is one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Amer Sports' credit profile, including its exposure to highly discretionary spending, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's rating action reflects the impact on Amer Sports of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The rating action also incorporates material governance considerations. Following its acquisition by a consortium of investors led by ANTA Sports in 2019, Amer Sports delisted from the Helsinki Stock Exchange and its transparency and public disclosure are now inferior to those of a listed company. However, Amer Sports is a sizeable and strategic investment for ANTA Sports. ANTA Sports has a strong credit profile and has the capacity to provide support to Amer Sports, in Moody's view.

STRUCTURAL CONSIDERATIONS

The B3 ratings assigned to the €1,700 million senior secured term loan B due 2026 and the €315 million senior secured RCF due 2025 are in line with the CFR, reflecting the fact that these two instruments rank pari passu and represent substantially all of the company's financial debt. The term loan and the RCF are secured by pledges over Amer Sports' major brands as well as shares, bank accounts and intragroup receivables and are guaranteed by the group's operating subsidiaries representing at least 80% of the consolidated EBITDA.

The B3-PD PDR assigned to Amer Sports reflects Moody's assumption of a 50% family recovery rate, given the limited set of maintenance financial covenants comprising only a springing covenant on the RCF, tested when its utilization is above 40%.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that the decline in revenue may be more severe than the rating agency currently expects, because of the unpredictable nature of the current operating environment. The negative outlook also reflects Moody's view that it will be challenging for the company to achieve the planned cost reduction to the full extent and in a timely way, and that it may face a significant net working capital absorption, which will exert additional pressure on its already strained liquidity. The negative outlook also captures the uncertainty related to the recovery in Amer Sports' performance beyond 2020, including its ability to reduce leverage from a very high level expected in 2020.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of Amer Sports' ratings is currently unlikely, given the negative outlook, the challenging operating environment and the uncertainty related to consequences of the company's likely covenant breach. Positive pressure on the company's ratings might build up over time if it (1) improves liquidity and maintains at least moderate headroom against the covenant threshold; (2) demonstrates a consistent revenue and EBITDA recovery path; (3) reduces its leverage, measured by Moody's-adjusted gross debt to EBITDA ratio, towards 6.5x on a sustainable basis; and (4) returns to positive free cash flow generation.

The ratings could be downgraded further if the company's credit metrics deteriorate beyond Moody's current expectations or remain at very high levels beyond 2020, due to more protracted implications of the coronavirus outbreak or the company's failure to adjust its cost base in response to an abrupt revenue drop. Quantitatively, this would translate into Amer Sports' leverage remaining above 8.0x in 2021. The ratings would come under immediate negative pressure if the company's liquidity further deteriorates, such as if the likelihood of cash shortfall increases or if the covenant breach occurs and is not remedied.

LIST OF AFFECTED RATINGS

..Issuer: Amer Sports Holding 1 Oy

Downgrades:

....Probability of Default Rating, Downgraded to B3-PD from B1-PD

....Corporate Family Rating, Downgraded to B3 from B1

Outlook Action:

....Outlook, Changed To Negative From Stable

..Issuer: Amer Sports Holding Oy

Downgrade:

....Backed Senior Secured Bank Credit Facility, Downgraded to B3 from B1

Outlook Action:

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Domiciled in Helsinki, Finland, Amer Sports is a global sporting goods company, with sales in 34 countries across EMEA, the Americas and APAC. Focused on outdoor sports, its product offering includes apparel, footwear, winter sports equipment, fitness equipment and other sports accessories. Amer Sports owns a portfolio of globally recognised brands such as Salomon, Arc'teryx, Peak Performance, Atomic, Suunto, Wilson and Precor, encompassing a broad range of sports, including alpine skiing, hiking, running, diving, tennis, golf and American football. In 2019, Amer Sports generated a revenue of €2.9 billion (2018: €2.7 billion) and EBITDA of €286 million (2018: €301 million).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

Igor Kartavov
Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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