TEXT-S&P rates New Academy Finance Co 'B'
Overview -- U.S. sporting goods retailer Academy is raising $400 million senior notes and will use the proceeds to fund a dividend to its shareholders. -- We are assigning our 'B' corporate credit rating to New Academy Finance Co. LLC and a 'CCC+' issue-level rating with a '6' recovery rating to the proposed notes. -- We are also affirming all existing ratings on Academy Ltd., an indirect subsidiary of New Academy Finance Co. LLC. -- The stable outlook reflects our expectations for an improvement in credit measures over the next 12 months, albeit at a slower pace because we do not expect margin gains to be as outsized as witnessed in the prior year. Rating Action On Dec. 6, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate credit rating to New Academy Finance Co. LLC, the parent of Academy Ltd. This company is being set up to issue the new notes. At the same time, we assigned a 'CCC+' issue-level rating with a '6' recovery rating to New Academy Finance Co. LLC and co-borrower New Academy Finance Corp.'s $400 million senior notes. Concurrently, we affirmed all existing ratings on Academy Ltd., including our 'B' corporate credit rating. Although the proposed debt-financed dividend leads to a deterioration of the company's credit profile, we believe that Academy will continue to increase both revenues and profitability, ultimately leading to improved credit measures over the next 12 months, partly mitigating the increase to leverage. The company plans to use proceeds from the proposed notes to fund a $400 million dividend to its shareholders. Rationale The ratings on Katy, Texas-based sporting goods retailer Academy reflect its "weak" business risk profile and "highly leveraged" financial risk profile. The company's business profile incorporates Standard & Poor's Ratings Services' view of its participation in the highly competitive and fragmented sporting goods industry, the discretionary nature of its merchandise, and modest geographic concentration. The U.S. sporting goods retail industry is mature and fragmented. We believe it will remain highly competitive, with players that include Dick's Sporting Goods Inc. and The Sports Authority Inc., other sporting good specialty retailers, department stores, specialty apparel stores, mass merchants, and catalog and Internet retailers. The company has historically demonstrated relatively stable performance growth and we expect this trend to continue over the near term. Operating measures have been above its peers and we expect them to remain so over the near term, even with the addition of debt due to the dividend Our forecast for Academy's operating performance over the next 12 months includes the following assumptions: -- Low single-digit same-store sales increases and new store growth, leading to revenue gains in the low-double digits for 2013; -- EBITDA margins to improve modestly because of better operating efficiencies and gains from continued supply chain improvements; -- Positive free cash flow generation, even though we anticipate capital expenditures to increase from prior years because of new store growth; and -- Operating lease obligations to grow in the high-single digits. With the increase in debt, we now expect debt leverage to decline to the high-5x area, with interest coverage to increase to about 2.5x and funds from operations (FFO) to debt to be approximately 12% over the next 12 months. These ratios are indicative of a highly leveraged financial risk profile. Although we anticipate some improvement over the near term because of moderate performance gains, we do not expect a meaningful strengthening of the company's credit protection measures due to possible future increases of debt to fund additional dividends. Liquidity We view the company's liquidity as "adequate." We expect that cash sources will likely exceed uses over the next 12 months. Sources of liquidity for the company include projected available borrowing capacity under its $650 million revolving credit facility, excess cash, and FFO. Cash uses over the near term are amortizations, seasonal working capital swings, and modest growth in capital expenditures, primarily to support new stores. Relevant aspects of the company's liquidity are as follows: -- Sources of liquidity over the next 12 months will exceed its uses by 1.2x or more. -- Sources will continue to exceed uses, even if EBITDA were to decline by 15%. -- Aside from a springing covenant, which we do not see coming into effect over the next 12 months, there are no other financial covenants. -- We believe that the company has sound relationships with its banks. Recovery analysis For the recovery analysis, see the recovery report on Academy, to be published soon after this report on RatingsDirect. Outlook The stable outlook reflects our expectations for an improvement in credit measures over the next 12 months, albeit at a slower pace because we do not expect margin gains to be as outsized as witnessed in the prior year. We anticipate performance will continue to be positive primarily because of revenue gains, resulting from positive same-store sales coupled with new store growth. The operational gains are likely to benefit the company's credit protection measures, but we anticipate that it will likely remain highly leveraged with thin cash flow protection measures, given the recent addition of debt. We could lower the rating if the company is unable to successfully manage its growth or if merchandise missteps result in meaningful margin pressures. At that time, margins would be about 230 basis points below our expectations and same-store sales would be flat. Under this scenario, debt leverage would be in the low-7.0x area. We could also lower the rating if the company becomes more aggressive with additional debt financed dividends, increasing leverage to a similar level. Although we consider an upgrade unlikely over the near term, we would raise the rating if operating performance exceeds our forecast. The company would have demonstrated moderately positive same-store sales increases, managed its new store growth well and reduced debt by approximately $500 million from current levels. Under this scenario, credit protection metrics would have improved substantially, with leverage at about 5x. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15, 2008 Temporary contact number: Kristina Koltunicki (646-276-0214). Ratings List New Rating New Academy Finance Company LLC Corporate Credit Rating B/Stable/-- New Academy Finance Company LLC New Academy Finance Corp. Senior Unsecured US$400 mil sr nts CCC+ Recovery Rating 6 Ratings Affirmed New Academy Finance Corp. Senior Unsecured CCC+ Recovery Rating 6 Academy Ltd. Senior Secured B Recovery Rating 4 Senior Unsecured CCC+ Recovery Rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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