S&P signaled that Playboy has performed under its expectations, and it believes that the company is now at risk of violating its leverage and interest coverage covenants in the third or fourth quarter of 2013. S&P warns that this risk could potentially jeopardize its access to its revolving credit facility.
S&P’s downgrade said”
We are lowering the corporate credit rating to ‘CCC+’ from ‘B-‘. We are also lowering the issue–level ratings on the company’s senior secured debt to ‘B-‘ from ‘B’. The developing outlook reflects the potential for a further downgrade in the next 12 months if the company faces further delays in securing new licensing contracts, which would increase the company’s risk of violating the total leverage and interest coverage covenants.
S&P did at least say that it could upgrade Playboy’s corporate credit rating if it improves operating performance or receives an amendment that raises its covenant headroom above 10%. How likely this is we cannot really comment on. S&P also said, “The ‘2’ recovery rating indicates our expectation of substantial (70% to 90%) recovery for lenders in the event of a payment default.”
The S&P downgrade on Playboy does not formally warn of bankruptcy. The problem is that it goes all the way around the warning that it is implied. Here are some of the phrases used in the downgrade that bring so much concern:
- risk of violating covenants
- based on the uncertain timing of new deals in Playboy’s licensing pipeline
- risks surrounding the long-term success of this business model
- weak performance … linked to a series of deals that did not close in the first half of 2013
- has a “highly leveraged” financial risk profile
- weak credit measures and aggressive financial policy
- business risk profile “vulnerable”
- recent operating shortfalls
- exposure to declining business segments that will continue to restrain growth
- uncertainty regarding the long-term success of its transition to a content licensing model
- inability to date to meet operating goals
- view the company’s management and governance as “weak”
- ownership by a private-equity sponsor that has capitalized the company heavily with debt during a major business transition
- near breach of its minimum EBITDA covenant twice over the past 18 months
- recorded significant restructuring charges as it transitioned to a brand management company
Playboy is certainly one of the iconic American brands. It is also a brand that becomes less and less prominent as it fights negative print media trends and has to fight for eyeballs in a world full of free online adult entertainment.
Failure to secure these deals in the third or fourth quarter will pressure the company’s covenant headroom. However, the addition of these high-margin licensing deals would improve operating performance and likely prevent a covenant violation. Playboy’s television and digital assets segment had been hampered by the availability of free adult content on the Internet.
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