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Rating Action:

Moody's upgrades Topgolf's CFR to B3 following acquisition by Callaway; outlook is stable

10 Mar 2021

New York, March 10, 2021 -- Moody's Investors Service, ("Moody's") upgraded Topgolf International, Inc.'s (Topgolf) Corporate Family Rating (CFR) to B3 from Caa1, Probability of Default Rating (PDR) to Caa1-PD from Caa2-PD, and the first lien credit facility ratings (including a senior secured revolver and term loan) to B3 from Caa1. The outlook is stable. These actions conclude the review for upgrade that was initiated on October 29, 2020.

The upgrade of Topgolf's ratings and the stable outlook reflect the acquisition of the company by Callaway Golf Company (Callaway) which is expected to further enhance Topgolf liquidity position and investment flexibility, although Callaway will not guarantee Topgolf's outstanding debt. While the pandemic has had a substantial negative impact on performance and resulted in negative EBITDA LTM Q3 20120, results are projected to improve as the economy recovers from the pandemic and as new venues are opened in 2021 and 2022. As part of the acquisition, all preferred equity will be converted to common equity. Moody's expects Callaway will provide additional funding to continue developing new venues after the existing venues under construction are completed which will support continued growth and geographic diversification.

Upgrades:

..Issuer: Topgolf International, Inc.

.... Corporate Family Rating, Upgraded to B3 from Caa1

.... Probability of Default Rating, Upgraded to Caa1-PD from Caa2-PD

....Senior Secured Bank Credit Facility, Upgraded to B3 (LGD3) from Caa1 (LGD3)

Outlook Actions:

..Issuer: Topgolf International, Inc.

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

Topgolf's B3 CFR reflects the implied support by Callaway, despite the lack of a guarantee provided to Topgolf's outstanding debt. Topgolf raised $180 million of preferred equity in 2020 to bolster liquidity and provide funding for the completion of venues currently under construction, but Callaway is expected to provide additional funding for new venues going forward. As new venues are opened, Topgolf's scale and geographic diversity will increase further and Moody's expects Topgolf will achieve increased sponsorship revenue after being acquired by Callaway. Topgolf's smaller Toptracer business is also projected to benefit from faster growth due to Callaway's worldwide business relationships. Topgolf's locations have reopened after being closed due to the coronavirus, but are operating below normal levels and a few locations have had to close temporarily as a result of surges in the pandemic in some markets. Topgolf's gameplay and food and beverage segment are expected to recover faster than the event business. The venues are high quality and typically significant in size which provides a unique experience to its guests and materially differentiates it from basic driving ranges and golf courses. Enhanced consumer interest in golf over the past year is also projected to support Topgolf's recovery from the pandemic. While revenue generated from Topgolf's venues account for most of its revenue, the company also benefits from smaller business segments including Media, Swing Suite, Toptracer, and an international licensing division.

Topgolf was substantially impacted by the coronavirus outbreak which led to negative EBITDA LTM as of Q3 2020 with over $500 million of outstanding debt in addition to operating leases and landlord financings related to its venues. While operating performance is expected to improve over the next year as health restrictions are eased and consumer spending increases, Moody's expects some consumers will maintain social distancing and avoid crowds so a recovery to prior levels is not expected until at least 2022. Topgolf's business will remain cyclical and will compete for discretionary consumer income with an increasing array of alternative entertainment options. The large number of pro forma add backs to EBITDA for one-time startup costs and run rate operating performance of new locations is also a negative.

A governance consideration that Moody's considers in Topgolf's credit profile is the expected moderation of the company's financial policy following the acquisition by Callaway. While Topgolf will continue the development strategy of building and opening several new facilities, Callaway is projected to help fund the construction costs. As a result, Topgolf is projected to be less reliant on the ability to raise additional funding through preferred equity as the company was in the past. Although, free cash flow is projected to remain negative over the next several years given significant growth capex on new venues.

The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of consumer spending from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The stable outlook incorporates Moody's expectation of improving performance as health restrictions ease and the economy recovers from the impact of the pandemic as well as from new venue openings in 2021 and 2022. Topgolf is also expected to benefit from improved liquidity following the acquisition by Callaway and be less reliant on additional preferred equity or debt to fund venue expansion. Moody's projects operating cash flow will turn positive in 2022 and that debt-to-EBITDA leverage levels will decline to the 6x range by the end of 2022 driven by existing and new venue growth.

Topgolf's liquidity position is adequate and is supported by a $175 million revolving credit facility due February 2024 with $160 million drawn and $182 million of cash on the balance sheet as of Q3 2020. Topgolf's liquidity benefited from $180 million of new preferred equity raised in 2020 which will be converted to common equity as part of the acquisition by Callaway. Operating cash flow is not projected to turn positive until 2022 due to the disruption caused by the pandemic, but Moody's expects Callaway will provide additional funding to complete the construction of additional venues. Topgolf executed an amendment in September 2020 that provides a covenant waiver period through Q1 2022, but will be subject to a minimum liquidity test of $30 million.

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

An upgrade could occur if debt-to-EBITDA leverage is projected to be maintained below 6x with flat to positive organic same venue revenue growth. An adequate liquidity position with a fully funded development plan would also be required as would a sufficient cushion of compliance with its financial maintenance covenants.

The ratings could be downgraded due to elevated concerns about the potential for default on Topgolf's outstanding debt or a distressed exchange arising from a period of weak operating performance or a decline in support from Callaway. A deterioration of Topgolf's liquidity position or inability to obtain an amendment to its financial covenant in the future, if needed, would also lead to a downgrade.

Topgolf International, Inc. currently owns and operates 61 golfing centers (58 in the US and 3 in the UK) as of December 2020 with 9 additional facilities under construction in the US and 1 in the UK. There are also 3 international franchise venues located in Australia, Mexico, and the United Arab Emirates. The company has a Swing Suites offering that provides a simulated golf experience, its Toptracer golf tracking technology for traditional driving ranges, courses and broadcasters as well as its Media division. Callaway Golf Company acquired Topgolf in March 2021. Prior to the acquisition, Topgolf was privately owned by a group of investors that include WestRiver Group, Providence Equity Partners, Dundon Capital Partners, Callaway Golf and Fidelity Research and Management. Reported revenue LTM as of Q3 2020 was over $750 million.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Scott Van den Bosch
VP - Senior Credit Officer
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

Stephen Sohn
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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