S&P: Tornante-MDP Joe Holding LLC 'B' Rating Affirmed On Senior Secured Maturity Extension And Cash Distribution To Owners
The ratings affirmations follow the company's announcement that it plans to extend the maturity of its senior secured credit facilities (consisting of a $30 million revolving credit facility and a $135 million first-lien term loan with $127 million outstanding) to 2020 from 2018. The term loan and revolving facility are issued by Tornante-MDP Joe's subsidiary The Topps Co. Inc. The recovery rating on this debt remains '3', reflecting our expectation for meaningful (50%-70%; upper half of the range) recovery for lenders in the event of a payment default.
"We have affirmed our 'B' corporate credit rating on Tornante-MDP Joe Holding LLC because, although we are forecasting leverage to increase by half of a turn [adjusted debt to EBITDA to the low-4x area at the end of 2016 from the high-3x area at the end of 2015], we continue to expect interest coverage to remain good, in the low-3x area, and for the company to maintain adequate liquidity through 2017," said S&P Global Ratings credit analyst Daniel Pianki. Our forecast for leverage reflects a high-single-digit to low-double-digit percent decline in EBITDA, which we believe will result in part from the loss of the physical NFL license at the end of the 2015-2016 season, and from a modest increase in costs and expenses.
The loss of major contracts is one of the risk factors we incorporate into our business risk assessment of Tornante-MDP Joe, along with the company's narrow focus within two consumer-based businesses (confectionery and sports and entertainment) and its participation as a price follower within the highly competitive North American non-chocolate confectionery industry, which occasionally reduces margin during periods of price pressure. The company also has a small scale of operations compared with other leisure and entertainment companies, is dependent on consumer discretionary spending, and has high competition from other consumer-oriented substitutes. We consider the company's trading cards and collectibles business to be susceptible to high demand volatility because demand is highly dependent on the success and popularity of certain sports, movies, and TV shows, and is subject to fad risk. Partly mitigating these risks are barriers to entry arising from existing multiyear licensing contracts within its cards business, geographic diversity (about 30% of sales are outside North America), and customer diversity.
The stable rating outlook reflects our forecast for EBITDA interest coverage to remain good (in the low-3x area) and for the company to maintain an adequate liquidity position through 2017. This is notwithstanding our expectation for adjusted leverage to increase through 2016 given our forecast for a high-single-digit to low-double-digit EBITDA decline in 2016.
We could consider lowering the ratings if operating performance meaningfully declines, resulting in an impairment to the company's liquidity profile, a decline in EBITDA interest coverage to less than 2x, sustained adjusted debt to EBITDA above 6x, or our belief that the company could breach the financial covenant under its credit agreement.
Higher ratings are unlikely at this time given the company's financial sponsor ownership. However, we could raise the rating if we believe adjusted debt to EBITDA would be sustained under 4x.