Credit rating agencies are not exactly fired up about guns this holiday season.
Private equity-backed Remington Outdoor Co. was downgraded from CCC+ to CCC- by S&P Global Ratings on Friday, Nov. 17, a week after Moody's Investors Service Inc. put fellow gunmaker Vista Outdoor Inc. (VSTO) on review for downgrade. S&P subsequently downgraded Vista to B+ from BB on Monday. Ratings below triple B from the credit agencies are considered noninvestment grade, high yield or junk.
Vista Outdoor maintains a Ba3 rating from Moody's. The ratings agency downgraded Remington in June from Caa1 to Caa2, setting a stable outlook on the Cerberus Capital Management LP portfolio holding.
The downgrades follow a year of lagging demand for gun sales following President Donald Trump's election.
"Right now, the gun industry is in flux," Moody's senior credit officer Kevin Cassidy told TheStreet. "We're waiting for the demand level to normalize. ... We're not putting the entire industry under review, but we are watching it."
Since Trump took office, a handful of gun manufacturers have become unprofitable.
Moody's placed Vista in review, for instance, because of its laggard second-quarter results. Its gross profit of $139 million is down 25% year over year, and the $587.3 million in sales reflects a 14% dip. Vista's earnings loss totaled $2.01 per share. That's more than $3 lower than the second quarter of 2016, where the company posted $1.23 in earnings per share.
"Leverage was higher than we anticipated, and that gets into their debt outstanding," Cassidy said. "We knew overall earnings would be down, but they were lower than we expected."
A Vista representative did not return a request for comment.
The Farmington, Utah, company has $1.06 billion in total debt, including a $115 million revolving credit facility and $592 million in secured term loans due April 1, 2021, and $350 million in 5.875% senior unsecured notes due Oct. 1, 2023.
Vista makes firearms under the Savage Arms brand and ammunition under the Federal Premium brand. It also produces CamelBak hydration systems, Bushnell binoculars and Bell cycling helmets, among other outdoor gear.
As for Remington's downgrade, S&P Global cited an unfavorable forecast on operating cash over the next four months.
On its $575 million senior secured term loan due April 19, 2019, S&P reduced Remington's chances of recovery in the case of default to 35%. Its third-lien 7.875% notes due May 1, 2020, point to an even unlikelier chance of recovery, 0%, in the case of payment default, S&P said. In other words, if the Madison, N.C., company defaults on the third-priority debt -- placed at $245.8 million by FactSet -- those creditors likely would be wiped out in a restructuring. (Bloomberg data showed slightly different totals for the debt tranches, $580 million for the term loan and $250 million for the notes.)
According to FactSet, Remington reported a 31% year-over-year decline in revenue for its third quarter, from $221 million in 2016 to $154 million. Meanwhile, firearms sales decreased 78% compared with the same period last year, to $5.4 million. That's a decrease of $19.1 million.
Remington has about $960 million in total debt, according to FactSet, which includes a revolving credit facility due 2019 in addition to the term loan and notes.
"We believe the deterioration in operating cash flow could result in an unsustainable reliance on the [asset-based lending] revolver, weak liquidity and a heightened risk of a restructuring of some form over the next six to 12 months," S&P said. The agency continued it could "lower ratings if Remington announces plans to engage in a restructuring, miss an interest payment, file for bankruptcy or extend the maturity of any of its debts in a manner that results in lenders receiving less than full and timely payment."
Remington's first default could come as soon as next year, S&P said.
The company and Cerberus could not be reached for immediate comment.
Remington's brands include Remington, Marlin, Bushmaster and DPMS. Cerberus put the gunmaker, then known as Freedom Group Inc., on the block in 2012 following the Sandy Hook Elementary School massacre in Connecticut, where the gunman used a Bushmaster rifle. The private equity firm, however, reportedly could not find a buyer and instead let limited partners invested in the company cash out.
The gun industry troubles aren't just affecting manufacturers, of course.
On March 10, gun seller Gander Mountain Co. filed for Chapter 11 bankruptcy protection, citing "challenging traffic patterns and shifts in consumer demand." Gunmakers Vista Outdoor, Sig Sauer Inc. and Remington were listed among the five largest unsecured creditors of the St. Paul, Minn., outdoor products retailer, which sold its assets to Camping World Holdings Inc. (CWH) in May for $37.75 million.
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Editors' pick: Originally published Nov. 23.