S&P Global Ratings raised its issuer credit rating on U.S. sock manufacturer Renfro Corp. to ‘CCC-’ from ‘SD’ (selective default). At the same time, S&P raised its issue-level rating on Renfro’s term loan to ‘CC’ from ‘D’ and assigned its ‘CCC+’ issue-level rating to the new priming term loan.
Renfro recently completed a transaction wherein it borrowed $10.1 million under a priming new money term loan and permitted its existing term loan lenders that participated in the new debt issuance to roll up a portion of its existing term loan into the new priming term loan. Although 100% of Renfro’s lenders approved the transaction, S&P viewed it as tantamount to a default on the existing term loan because the existing term loan is now in a junior collateral position relative to the newly issued tranche and the company’s operations are distressed. The transaction also extended Renfro’s waiver such that it remains in compliance with the going concern covenant in its credit agreements. In addition, it provided the company with some additional liquidity to help support its operations through the next few months. However, S&P still views Renfro’s capital structure as unsustainable. The company’s revolver expires in February 2021 and its term loan matures in March 2021. Given Renfro’s operating underperformance over the past several years, double-digit leverage, negative free cash flow generation, and tight covenant cushion–along with the uncertainty stemming from the COVID-19 pandemic—S&P believes it will be challenging for the company to refinance its debt before it matures. Therefore, a default or restructuring appears inevitable in the next six months.
The negative outlook on Renfro reflects the high probability the company will default on its debt obligations or engage in a restructuring transaction over the next six months.
S&P could lower its rating on Renfro if it misses a principal or interest payment, files for bankruptcy protection, or announces a debt restructuring.
S&P could raise its rating on Renfro if it no longer believes there is a high probability of a near-term default, bankruptcy filing, or other form of debt restructuring. This would likely require the company to successfully refinance both its asset-based lending (ABL) revolver and term loan on satisfactory terms.