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adidas AG -- Moody's assigns A2 rating to adidas' new senior unsecured notes

·15 mins read

Rating Action: Moody's assigns A2 rating to adidas' new senior unsecured notes

Global Credit Research - 01 Sep 2020

Paris, September 01, 2020 -- Moody's Investors Service ("Moody's") has today assigned an A2 rating to the proposed senior unsecured notes issued by adidas AG (adidas), consisting of E500 million notes due 2024 and E500 million notes due 2035. adidas' current A2 long-term issuer rating and Prime-1 (P-1) short-term issuer rating are unaffected by the issuance of these notes. The outlook on adidas is unchanged at stable.

The net proceeds from the new notes will be used for general corporate purposes and to pre-fund upcoming and medium-term debt maturities.

"adidas' debt issuance is further evidence of the company's prudent financial and liability management because it will pre-finance medium term debt maturities, meaningfully extend its debt maturity profile and further strengthen its already good liquidity, a credit positive during these uncertain times", said Guillaume Leglise, a Moody's Assistant Vice-President-Analyst and lead analyst for adidas.

RATINGS RATIONALE

The A2 debt rating assigned to today's E1 billion bond issuance is in line with the A2 long-term issuer rating of adidas. adidas' A2 rating reflects (1) the company's leading position in the global sportswear market and wide geographic diversification, with E23.6 billion of revenues in 2019; (2) its strong brand recognition in the apparel and footwear industry supported by product innovations and significant marketing and sponsorship investments; (3) the positive long-term prospects of the industry with increasing health awareness of customers and increased sports participation rates in key emerging markets, such as China; (4) its solid track-record of sales growth and operating margin improvement over the last five years; and (5) its low gross leverage, good liquidity and conservative financial policies.

adidas' rating also incorporates (1) the impact of the coronavirus outbreak, which Moody's anticipates will weigh on the company's earnings and debt protection ratios in the next 12 months; (2) its exposure to the highly competitive apparel and footwear industry, which is characterized by changes in consumer habits, growing digitalization and increasing awareness over sustainability issues; (3) the company's sales concentration on a single brand; (4) the company's sizable commitments to pay fixed sponsorship obligations; and (5) the challenges related to the turnaround of Reebok, notably in the US market.

Moody's views today's transaction favorably because the issuance will be used to pre-fund medium term debt maturities and it extends the company's debt maturity profile. This also reinforces adidas' liquidity profile, with additional cash on balance sheet, at a time when trading conditions remain challenging and the pace of sales recovery remains uncertain. This transaction is a first step in the company's objective to replace its E3 billion syndicated revolving credit facility with Kreditanstalt fuer Wiederaufbau (KfW, Aaa stable). Moody's expects adidas will replace its KfW facility by a new multiyear committed syndicated credit facility and the issuance of long-term bonds over time. As of the end of June 2020, the company had total liquidity of E5.2 billion, including a cash balance of E2 billion, E230 million available under its existing committed credit facilities and full availability under its E3 billion KfW credit line. adidas' next significant debt maturity is October 2021, when E600 million of senior unsecured notes are due.

RATING OUTLOOK

The stable outlook reflects Moody's expectations that adidas will retain strong credit metrics over time, despite the material impact of the coronavirus crisis on its earnings and cash flows in 2020. The outlook reflects Moody's expectations that (1) a gradual recovery in the company's revenues over the course of the next 12-18 months will result in its credit metrics returning towards their pre-crisis levels from 2022, and (2) adidas' liquidity will remain good.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is considered unlikely in the short term because of the uncertainties related to the coronavirus outbreak and its negative impact on the company's performance this year. Moody's could upgrade adidas' ratings over time if (1) it continues to successfully deliver on its long-term strategy, including the strengthening of its Reebok brand and an improved market position in the US, (2) achieves further operating margin enhancements, and (3) maintains conservative financial policies.

Quantitatively, Moody's could consider an upgrade if the company's (Moody's-adjusted) gross leverage were to trend sustainably below 1.5x and its (Moody's-adjusted) retained cash flow (RCF)/net debt ratio remains above 45% on a sustained basis.

Conversely, the rating agency could downgrade adidas's ratings if the company's operational and financial performance were to deteriorate for a prolonged period of time, such that its (Moody's-adjusted) gross leverage exceeds 2.5x especially if not sufficiently mitigated by sizeable cash on balance sheet, and its RCF/net debt ratio decreases below 35% for a prolonged period of time. A rating downgrade could also be considered should the company's liquidity deteriorate or if it pursues more aggressive financial policies.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Apparel Methodology published in October 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1182038. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

With E20.6 billion of revenue in the 12 months to 30 June 2020, adidas is the second largest company in the sportswear industry, behind NIKE, Inc. (A1 negative). The company has over 2,500 own-retail stores, over 15,000 mono-branded franchise stores and over 150,000 wholesale doors. Its shares are listed on the Deutsche Börse in Frankfurt Stock Exchange, and adidas has a current market capitalization of around E51 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Guillaume Leglise AVP-Analyst Corporate Finance Group Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Jeanine Arnold Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454

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