S&P Global Ratings lowered its rating on Wisconsin-based small engine manufacturer Briggs & Stratton Corp. (BGG) to ‘CCC-’ from ‘CCC’. In addition, S&P lowered its rating on the company’s unsecured notes to ‘CC’ from ‘CCC-’. Its ’5′ recovery rating (rounded estimate: 10%) on the notes is unchanged.
BGG’s asset-based lending (ABL) facility, which had $402 million drawn at March 29, 2020, will mature on Sept. 15, 2020, if the company does not repay its $195 million of outstanding unsecured notes by this date or maintain the applicable ABL availability level required by the credit agreement.
A combination of very high leverage and operating challenges appear likely to cause a default or distressed restructuring before the Sept. 15, 2020, springing ABL maturity. BGG’s operating performance, which was soft during fiscal year 2019 due to unfavorable weather and the Sears bankruptcy, has faced much stronger headwinds in fiscal year 2020 (FY20) due to the economic impact of the coronavirus pandemic.
“We believe BGG’s very high debt load will remain unsustainable, reducing the likelihood of the company refinancing the $195 million of unsecured notes at par. Although the operating environment may not be as challenging in FY21 as it was in FY20, we forecast sales will continue to decrease next year as the company and its channel partners continue to deal with weaker demand due to the coronavirus and resulting economic slowdown. Profitability will likely improve only modestly on cost-cuts and operating efficiencies. As a result, we expect leverage will remain well above 10x throughout FY21,” S&P said.
Internal liquidity may be insufficient to repay the $195 million of unsecured notes. BGG had only $44 million of cash and $74 million of ABL availability at March 29, 2020. Although these amounts may improve throughout the summer as BGG reduces inventory, the company may not have sufficient liquidity to fully repay its unsecured notes by Sept. 15 and therefore eliminate the springing ABL maturity. Furthermore, repayment of the notes would deplete the liquidity BGG needs to fund capital expenditures as well as working capital accumulation in the first half of the year prior to its 2021 peak selling season. Despite management’s efforts to reduce peak inventory needs, S&P expects intrayear working capital needs will remain a significant use of liquidity.
“Considering BGG’s challenged capital structure and our expectation for weak operating performance, we would likely view a restructuring of the unsecured notes as distressed and thus akin to a default. The unsecured noteholders could enter formal negotiations that could result in extension of the debt maturities or in debtholders receiving less than par. Although this could benefit BGG’s capital structure, we believe creditors would likely receive less than the original promise if the company were to restructure its debt, which we would consider a default,” S&P said.
The negative outlook reflects the heightened risk that the company could default on its debt obligations or pursue a distressed debt restructuring within the next six months.
S&P could lower its rating on Briggs & Stratton if the company:
— Enters into or plans to announce a distressed restructuring or bankruptcy filing.
— Misses either the upcoming interest payment due June 15, 2020, or does not repay the unsecured notes at maturity.
Although highly unlikely given S&P’s expectations for challenging operating performance and capital market conditions over the next 12 months, it could raise its ratings on BGG if it expects it will refinance its upcoming unsecured notes maturities at par.