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Global Credit Research - 17 Feb 2011
Approximately EUR28 million worth of rated debt affected
Milan, February 17, 2011 -- Moody's Investors Service has today upgraded Head NV's corporate
family rating (CFR) and probability-of-default rating (PDR)
to B3 from Caa1. Concurrently, the rating agency has upgraded
to Caa2 from Caa3 the senior unsecured rating on the EUR27.7 million
remaining outstanding of the notes due in 2014, issued by HTM Sport
GmbH (HTM). The outlook on the ratings is stable.
"Today's rating action reflects further strengthening in Head's
financial and liquidity profiles following the company's effort
to improve cash flow generation in recent years together with the debt
exchange completed during 2009. These measures are expected to
result in a financial leverage (measured as debt to EBITDA, adjusted
for operating leases and pension liabilities) in line with a single-B
rating going forward," says Paolo Leschiutta, a Moody's
Vice President-Senior Analyst and lead analyst for Head.
"Today's rating action also incorporates Moody's expectation
that Head will be able to take advantage of the modest recovering trends
in the sport equipment market, and in the pick-up in consumer
spending (which however is likely to remain volatile), and increase
its profitability. The B3 rating also assumes that the company
will address its 2012 debt maturities in due course," adds
During 2009, Head exchanged part of its senior unsecured notes (EUR135
million outstanding at the time) with EUR43.7 million worth of
new senior secured notes issued in August 2009 and ordinary shares of
Head. As a result of this extraordinary measure, and the
resulting debt reduction, together with Head's effort over
the years in reducing its operating costs increasing the share of outsourced
products, Moody's sees Head's lighter capital structure
as more adequate to support the existing business profile of the group.
During the first nine months of 2010, Head reported satisfactory
performance, especially in its Winter Sport division, the
volumes of which increased by mid-single digits and Moody's
expects this trend to have continued over Q4 2010. The company's
total turnover during the nine months to September 2010 was EUR218 million,
5.7% up compared to the same period in 2009. These
results reflect improving market conditions, moderately increasing
volumes and better sales-mix. Head's total operating
profit as at September 2010 (on a YTD basis) was ca. EUR6.9
million, compared with EUR2.1 million as of the same period
in FY 2009. Moody's recognises that Head's operating
profit was strengthened by: (i) a reduction in fixed costs (excluding
R&D and marketing expenses); (ii) the relocation of production
plants in low-cost countries; and (iii) increased outsourcing.
Indeed, the rating agency expects to see additional evidence of
these measures in Head's full-year 2010 accounts.
The stable outlook reflects Moody's view that the improvements made
by Head to its credit profile currently adequately position the company
in the B3 rating category. It also incorporates the rating agency's
expectation that, as a result of restructuring measures taken by
Head, the company will achieve improvements in its operating and
financial profiles, despite the likelihood that these will be partially
eroded by ongoing uncertainty in market conditions and expected raw-material
Moody's would consider downgrading the ratings if Head failed to
show the expected progress in improving its profitability and cash generation,
such that it were to exhibit: (i) an EBITA margin declining towards
the low single digits; (ii) a retained cash flow (RCF)/net debt ratio
trending towards the mid-teens; and (iii) a debt/EBITDA ratio
remaining above 6x. A deterioration in market conditions in the
markets served by the company could also trigger a downgrade.
Although unlikely at this stage, Moody's would consider upgrading
the ratings if Head were to achieve further improvements in its top line
and profitability, such that its EBITA margin were to increase towards
7% and further strengthen its financial profile, such that
its debt/EBITDA ratio were to decrease towards 4x on a sustainable basis.
Before giving any consideration to an upgrade, Moody's would
need to be satisfied with the company's liquidity profile and refinancing
The Caa2 senior unsecured rating on the remaining outstanding EUR27.7
million bond issued by HTM reflects its subordinated position in Head's
capital structure relative to the EUR43.7 million worth of new
senior notes issued by HTM in August 2009. These notes are secured
on a pool of inventories, receivables and cash under certain specified
conditions. The pool of assets offered as collateral must always
remain greater than the amount of the new senior secured notes; Moody's
acknowledges that the company has, to date, met this requirement.
Ratings upgraded today are:
.... Corporate Family Rating, Upgraded
to B3 from Caa1
.... Probability of Default Rating,
Upgraded to B3 from Caa1
.... Senior Unsecured Regular Bond,
Upgraded to Caa2 from Caa3
Moody's most recent rating action on Head was implemented on 18
May 2010, when the rating agency changed the company's outlook
to stable from negative. This rating action followed signs of stabilisation
in the company's financial and liquidity profiles after the conclusion
of the debt exchange, although market conditions and the company's
profitability remained subject to a degree of volatility.
The principal methodology used in rating Head was Moody's "Global
Consumer Durables Rating Methodology", published in October
2010. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's
Incorporated in the Netherlands, Head is a leading global manufacturer
and marketer of branded sporting goods serving the winter sports,
racquet sports and diving equipment markets, with strong market
positions and a good reputation for product innovation. The company
reported revenues of EUR331 million on an LTM basis as at September 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Italia S.r.l
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
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Moody's Italia S.r.l
Moody's upgrades Head NV to B3 from Caa1 (Netherlands)
Corso di Porta Romana 68
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