OREANDA-NEWS. S&P Global Ratings affirmed its ratings on Eden Prairie, Minn.–based Bluestem Brands Inc., including the 'B+' corporate credit rating, and removed them from CreditWatch with negative implications, where we placed them on June 23, 2016. The outlook is stable.

We also affirmed our 'B+' issue-level rating on the company's first-lien term loan. The '3' recovery rating on the debt is unchanged, indicating our expectations for meaningful recovery in the event of default, at the higher end of the 50% to 70% range.

"The affirmation reflects our belief that Bluestem will have at least a 15% cushion of covenant compliance over the next 12 months, excluding any quarterly seasonal volatility," said credit analyst Samantha Stone. "We project debt leverage will be under 4x and the company will have sufficient liquidity for operating needs despite our expectation that operating performance will be weaker versus last year. Our base-case assumptions include our belief that the company will manage costs in light of near term top line pressures from increased competition. We think operating performance could modestly improve in 2017 as management benefits from strategic initiatives implemented this year. The rating action also incorporates our view that Bluestem's parent, which has roughly $180 million of balance sheet cash as of April 29, 2016, could support the subsidiary if it needed additional liquidity. Still, this is not included in our base-case scenario assumptions because we project positive cash flows for 2016."

The stable outlook reflects our expectation that the company will maintain adequate cushion of compliance under its financial covenants, generate positive cash flows, and keep leverage below 4x over the next 12 months.

We could lower the rating if operating performance meaningfully declines such that free cash flow approaches negative territory or debt leverage increases more than 4x; perhaps from unsuccessful marketing efforts to acquire new customers and/or higher-than-expected charge offs at Bluestem Brands, which would reduce profit sharing in the credit portfolio.

Any rating upside is highly unlikely over the next 12 months given our view that operating performance will remain under pressure and the inherent volatility of profits in the company's business model. However, if we believe the company can demonstrate sustained growth and stable profitability from managing its credit exposure, we could revise our comparable ratings analysis to neutral from negative and this could lead to an upgrade.