Moody’s Investors Service has affirmed Callaway Golf Company’s corporate family rating (CFR) at B1 and probability of default rating at B1-PD. Moody’s has also assigned a B1 rating to the company’s new B senior secured term loan.
The company’s speculative liquidity is unchanged at SGL-2. The outlook remains negative.
Moody’s said Callaway plans to simplify its existing capital structure by refinancing its term debt at Callaway and Topgolf International, Inc. Topgolf was acquired by Callaway in March 2021 in an all-stock transaction valued at 1, $7 billion. Callaway plans to issue a 7-year, $950 million Term Loan B, the proceeds of which will be used to repay existing term debt at Callaway and TopGolf while returning approximately $166 million in cash to the balance sheet. The company also plans to roll out a new $500 million ABL to replace existing revolvers at Callaway and Topgolf. The B1 rating on Callaway’s existing B term loan is due in 2026, and Topgolf’s ratings are unaffected. Upon closing of this transaction and repayment of existing debt, Moody’s will remove the ratings of Topgolf and the existing term loans at Callaway and Topgolf.
Moody’s wrote, “Callaway’s CFR affirmation at the B1 level reflects its broad and growing product diversification within its three business segments which include golf equipment, golf-themed dining and entertainment, and clothes. However, despite this diversification, Topgolf’s rapid expansion comes with the potential for high future business execution risk given that Topgolf’s business is capital intensive, cyclical and discretionary. There also remains some risk that local entertainment will decline as consumers begin to travel more following the easing of travel restrictions. Moody’s expects golf to remain strong in 2022 given that it is conducive to social distancing. However, there remains a risk that some participants will reduce their golf practice as the coronavirus subsides. As families and office workers return to normal activities, there may also be constraints on golfers’ availability of time to practice the sport given the significant time investment required to practice and play. In addition, expanded vacation travel or inflationary pressure on the consumer may reduce attendance and spending on golf equipment and local entertainment activities.
“Callaway’s new capital structure will result in high financial leverage at closing of 5.7x pro forma debt to EBITDA (as of December 31, 2021), including operating leases at Topgolf that have been drafted due to purchase accounting at the time of the Topgolf acquisition and which Moody’s considers a debt. Drafting the leases has added about a U-turn to the leverage. Moody’s expects that financial indebtedness remains elevated through 2022 due to investments in Topgolf and then moderates to less than 5.5x debt to EBITDA ratio by mid-2023 However, the potential for future Execution challenges with its Topgolf expansion strategy or an unexpected drop in demand from its highly discretionary categories could derail its ability to deleverage If the company cannot improve its EBITDA, leverage could increase as the company continues to invest estir in Topgolf sites. While Callaway estimates its future investment needs in Topgolf have grown from approximately $200 million at the time of the acquisition to approximately $70 million at present, Moody’s expects Callaway to reduce new investments in Topgolf and preserves free cash flow if operating conditions turn negative. Moody’s further expects liquidity to remain strong with free cash of $352 million as of December 31, 2021 and full availability of its contemplated $500 million ABL facility.
“The negative outlook reflects execution risk in Callaway’s plans to expand its Topgolf locations and improve EBITDA, which could impact its ability to reduce leverage to less than 5.5x debt to EBITDA over the next 12 to 18 months as debt is expected to continue to rise to fund the construction of the Topgolf site. The negative outlook also reflects the potential for golf-related business to decline from elevated levels seen during the pandemic, which may ease as participation in a wider range of other leisure activities recovers.
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