Standard & Poor’s Raises Affinity Credit Ratings
Standard & Poor’s Ratings Services today (April 1) raised its ratings on Ventura, Calif.-based direct marketing company Affinity Group Holding Inc. (AGHI) and its operating subsidiary, Affinity Group Inc. (together referred to as “Affinity Group”).
“We raised our corporate credit rating on the company to ‘CCC’ from ‘D’ and raised our issue-level rating on AGHI’s 10.875% senior notes due 2012 to ‘CC’ (two notches lower than the ‘CCC’ corporate credit rating on the company) from ‘D’. The recovery rating on this debt remains unchanged at ‘6’, indicating our expectation of negligible (0%-10%) recovery in the event of a payment default,” according to a news release.
In addition, S&P noted, “We raised our issue-level rating on Affinity Group Inc.’s (AGI) 9% senior subordinated notes due 2012 to ‘CC’ (two notches lower than the ‘CCC’ corporate credit rating on the company) from ‘C’. We revised the recovery rating on this debt to ‘6’ from ‘5’. The revision of the recovery rating on the 9% senior subordinated notes due 2012 reflects the increase in secured debt following the refinancing of its credit agreement and the company entering into a new asset-based revolving credit facility. The recovery rating of ‘6’ indicates our expectation of negligible (0%-10%) recovery in the event of a payment default.”
AGI is the parent company of RVBUSINESS.com.
For more about this action, read more from the news release.
The ‘CCC’ corporate rating reflects the company’s thin liquidity, modest EBITDA coverage of interest and declining operating performance. It also reflects our concern that the company’s margin of compliance with covenants could diminish this year, that discretionary cash flow may be weak in 2010, and that the company may not be able to absorb the cost of an amendment, should it require covenant relief.
Standard & Poor’s is concerned that the company faces a tough challenge to maintain an adequate margin of compliance under its new senior credit facility because of continued pressure on the business from the weak economy and successive tightening of covenants, which begin Sept. 30, 2010.
Furthermore, the new credit facility could mature in November 2011, depending on Affinity’s ability to repay or refinance other debt.
On March 1, 2010, the company refinanced its credit agreement. Its first-lien facility was set to expire on March 31, 2010. The company also had second-lien notes due July 31, 2010. Both of these obligations were refinanced by the new $144.3 million senior secured facility. About $25.4 million of AGHI 10.875% senior notes were due on March 15, 2010. AGHI acquired these notes from the affiliates that held them and subsequently cancelled the obligations.
In conjunction with the transaction, AGI’s subsidiary Camping World Inc. entered into a credit agreement for an asset-based lending facility of up to $22 million, of which $10 million is available for letters of credit and $12 million is available for revolving loans. Despite the refinancing, we believe that refinancing risk still exists. The term loans mature on the earlier of March 15, 2015, or 90 days prior to the maturity of either AGI’s 9% senior subordinated notes due Feb. 15, 2012, or AGHI’s 10.875% senior notes due Feb. 15, 2012. This could mean that the new $144.3 million term loans will become due in November 2011.
Affinity Group is a direct marketer and retailer targeting North American RV owners and outdoor enthusiasts. Revenue and profitability deteriorated over the past two years because the weak economy put pressure on consumer discretionary spending and reduced advertising spending. The company is also indirectly vulnerable to fuel shortages and increases in gas prices. During 2009, EBITDA (excluding impairment charges) fell 26% year-over-year, on a 10% revenue decline, reflecting lower advertising sales, a decrease in licensing fees because of an agreement that was terminated in 2008 and a decline in exhibitor revenues from fewer consumer shows. The retail segment also contributed to the overall revenue decline, reporting a 7% revenue decline year-over-year because of the closure of some stores and a decline of 4.5% in same store sales. We are concerned that revenue and EBITDA could continue to decline if the economy remains weak.
Pro forma for the refinancing, lease-adjusted debt to EBITDA is high at roughly 8.7x, up from 7.7x for the 2008 year-end. Unadjusted EBITDA coverage of interest expense for the same period was thin at 1x, a decrease from the company’s EBITDA coverage of interest of 1.6x for 2008. We are concerned that the company’s EBITDA coverage of interest could deteriorate further in 2010 if EBITDA continues to decline. Moreover, if the margin of compliance with covenants thins, we are concerned that interest coverage and liquidity may not be sufficient to absorb the increased interest costs and fees associated with an amendment. Discretionary cash flow in 2009 was modestly positive.
Discretionary cash flow increased from the year ended Dec. 31, 2009, and resulted in a 29% conversion of EBITDA, because of lower capital expenditures.
The company did not open any stores in 2009. Although we expect that capital expenditures in 2010 will remain relatively low, we believe discretionary cash flow could decline as a result of higher interest expense and pressure on EBITDA.
Liquidity is weak. The company had $10.1 million of cash at Dec. 31, 2009, and we expect its cash balance will remain low. Its subsidiary Camping World Inc. entered into a credit agreement for an asset-based lending facility of up to $22 million. The facility could become due in September 2011. The facility matures on March 1, 2013, or 60 days prior to the maturity date of the new senior credit facility, or 120 days prior to the earlier maturity date of AGI’s 9% subordinated and AGHI’s 10.875% senior notes. Also, the term loan could mature in November 2011. The term loans mature on the earlier of March 15, 2015, or 90 days prior to the maturity of either the AGI’s 9% senior subordinated notes due Feb. 15, 2012, or AGHI’s 10.875% senior notes due Feb. 15, 2012. We remain concerned about refinancing risk because a significant portion of Affinity Group’s debt could mature in 2011 if these notes are not refinanced. Near-term debt maturities, however, are modest. The company’s term loan amortizes at a rate of 1% annually and quarterly amortization payments begin March 1, 2011.
We are also concerned about the company’s margin of compliance with financial covenants. Despite the refinancing, the company could have difficulty maintaining an adequate cushion of compliance under its new senior credit facility because of continued pressure on the business from the weak economy and because of successive tightening which begin Sept. 30, 2010. If the company’s margin of compliance thins, we are concerned that the company interest coverage and cash flow may not be sufficient to absorb the increased interest costs and fees associated with an amendment.
The rating outlook is negative and reflects our concern about liquidity amid continuing pressure on EBITDA and the possibility that a significant portion of its capital structure could become due in 2011. We are concerned both about the company’s ability to maintain an adequate cushion of compliance with its financial covenants and that it may not be able to meet the costs of an amendment should its margin of compliance with covenants diminish. We could lower the rating if we become convinced that the company could violate covenants within the near term or if it does not refinance its capital structure in a timely fashion. Based on our estimates, we believe the company could violate its interest coverage covenant as early as June. 30, 2010, if EBITDA does not increase. Factors that could contribute to such a scenario include prolonged economic weakness that contributes to further declines in advertising revenue and pressure on the retail segment. Although less likely, we could raise the rating if operating performance rebounds, if interest coverage and discretionary cash flow improve, if these trends widen the margin of compliance with financial covenants and if the risk of a meaningful near-term maturity is removed.