Callaway Golf Company -- Moody's assigns B1 to Callaway's new term loan, affirms the CFR at B1; outlook remains negative

Rating Action: Moody's assigns B1 to Callaway's new term loan, affirms the CFR at B1; outlook remains negativeGlobal Credit Research - 17 Feb 2022New York, February 17, 2022 -- Moody's Investors Service ("Moody's") affirmed Callaway Golf Company's ("Callaway") Corporate Family Rating ("CFR") at B1 and Probability of Default Rating at B1-PD. Moody's also assigned a B1 rating to the company's new senior secured term loan B. The company's Speculative Grade Liquidity is unchanged at SGL-2. The outlook remains negative.Callaway plans to simplify its existing capital structure by refinancing its term debt at Callaway and Topgolf International, Inc. ("Topgolf" CFR B3, Stable). Topgolf was acquired by Callaway in March 2021 in an all-stock transaction valued at $1.7 billion. Callaway plans to issue a $950 million 7-year term loan B, proceeds of which will be used to repay existing term debt at both Callaway and TopGolf while also returning approximately $166 million of cash to the balance sheet. The Company also plans to put in place a new $500 million ABL to replace existing revolvers at both Callaway and Topgolf. The B1 rating on Callaway's existing term loan B due in 2026 and the ratings of Topgolf are not affected. Upon closing of this transaction and repayment of the existing debt, Moody's will withdraw the ratings of Topgolf and of the existing term loans at Callaway and Topgolf.The affirmation of Callaway's CFR at B1 reflects its large and growing product diversification within its three business segments which include golf equipment, golf-themed restaurants and entertainment, and apparel. However, despite this diversification, the rapid expansion of Topgolf brings with it the potential for high future business execution risk given the Topgolf business is capital intensive, cyclical, and discretionary. There also remains some risk that local entertainment may decline as consumers start to travel more following easing of travel restrictions. Moody's expects golfing will remain strong in 2022 given it is conducive to social distancing. However, there remains risk that some participants may reduce golfing as the coronavirus subsides. As families and office workers return to normal activities, there may also be constraints on the availability of golfers' time to play the sport given the sizable time investment necessary to practice and play. Further, the broadening of vacation travel or inflationary pressure on the consumer may reduce participation and spending on golf equipment and local entertainment activities.Callaway's new capital structure will result in high financial leverage at close of 5.7x pro-forma Debt to EBITDA (as of December 31, 2021) inclusive of the operating leases at Topgolf that were written up due to purchase accounting at the time of the acquisition of Topgolf and which Moody's regards as debt. The write up of leases added about half a turn to leverage. Moody's expects financial leverage will remain high throughout 2022 due to investments in Topgolf and then moderate to below 5.5x debt-to-EBITDA by mid-2023. However, the potential for future execution challenges with its Topgolf expansion strategy or an unexpected waning in demand of its highly discretionary categories could derail its ability to deleverage. If the company cannot improve its EBITDA, leverage could increase as the company continues to invest in Topgolf venues. While Callaway beleives its future Topgolf investment requirements have declined from approximately $200 million at acquisition to approximately $70 million at present, Moody's expects that Callaway will curtail new investment at Topgolf and preserve free cash flow if operating conditions turn negative. Moody's further expects liquidity to remain good with cash on hand of $352 million as of December 31, 2021 and full availability of its contemplated $500 million of ABL facility.The negative outlook reflects execution risk in Callaway's plans to expand its Topgolf locations and improve EBITDA, which could impact its ability to reduce leverage to below 5.5x debt to EBITDA within the next 12 to 18 months since debt is likely to continue to increase to fund Topgolf venue construction. The negative outlook also reflects the potential for a pullback in golfing-related activities from elevated levels seen during the pandemic that may subside as participation in a broader array of other leisure activities is restored.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Callaway Golf Company....Senior Secured Term Loan B, Assigned B1 (LGD4)Ratings Affirmed:..Issuer: Callaway Golf Company.... Corporate Family Rating, Affirmed B1.... Probability of Default Rating, Affirmed B1-PDOutlook Actions:..Issuer: Callaway Golf Company....Outlook, Remains NegativeRATINGS RATIONALECallaway's B1 Corporate Family Rating reflects its high financial leverage and participation in the niche golfing-related products and apparel business that is highly discretionary. Callaway's credit profile is also constrained by high execution risk in its expansion plans for Topgolf, a business that is capital intensive and vulnerable to competition from other entertainment options and pullbacks in discretionary consumer spending, and requires significant investment outside of Callaway's traditional golf equipment business. Callaway's credit profile is supported by its strong market position and good geographic and product diversification in the broader golf-related category. The credit profile also reflects Callaway's good liquidity, large scale, and meaningful improvement in the golf equipment business over the last year driven by increased participation in golfing.The coronavirus outbreak and the government measures put in place to contain it continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, there is uncertainty around Moody's forecasts. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The consumer durables industry is one of the sectors most meaningfully affected by the coronavirus because of exposure to discretionary spending. Moody's expects that consumer interest in golf will continue to benefit Callaway over the next year as golfing will remain strong given it is conducive to social distancing, but there is risk of demand falling as the coronavirus pandemic eases.Because the company utilizes various metals, resins, energy, and other raw materials in its production process and distributes products, there is some environmental risk. The company must responsibly source raw materials and refine manufacturing processes to minimize the environmental effects. However, the environmental risks are not a significant credit factor.Callaway is publicly-traded and on a stand-alone basis has generally kept a conservative financial profile with modest leverage. However, combined company debt and leverage have increased following the acquisitions of Jack Wolfskin in January 2019 and Topgolf in March 2021 that requires significant investment. The all-stock investment in Topgolf is a conservative approach, but continued increases in debt to fund future investment needs in Topgolf could impede deleveraging.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be downgraded if operating performance weakens, liquidity deteriorates, or ongoing investments in Topgolf detracts from the company's ability to reduce financial leverage from current high levels. Leverage maintained above 5.5x debt to EBITDA could result in a downgrade.Ratings could be upgraded if operating performance is stable or improves across the company's golf and apparel businesses, and returns on the Topgolf investments are good. An upgrade would also require the company to maintain good liquidity, generate comfortably positive free cash flow before growth related investments and to improve EBITDA materially such that debt-to-EBITDA is sustained below 4.0x.As proposed, the new credit facilities are expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following: Incremental debt capacity up to the greater of (A) $455 million and (B) an amount equal to 100% of Consolidated EBITDA of the Borrower calculated on a pro forma basis as of the most recently completed four consecutive fiscal quarters plus unlimited amounts subject to the First Lien Leverage Ratio not to exceed 3.0x. Incremental debt amounts up to $455 million and an amount equal to 100% of Consolidated EBITDA may be incurred with an earlier maturity date than the initial term loans. Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, with no explicit protective provisions limiting such guarantee releases. The credit agreement provides some limitations on up-tiering transactions, including no amendment, waiver or consent, shall, without the prior written consent of each Lender directly affected thereby (i) subordinate, or have the effect of subordinating, the obligations under the Credit Documentation to any other indebtedness or other obligation, or (ii) subordinate, or have the effect of subordinating, the liens securing the obligations under the Credit Documentation to liens securing any other indebtedness or other obligation. The above are proposed terms and the final terms of the credit agreement may be materially different.The principal methodology used in these ratings was Consumer Durables published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276767. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Callaway Golf Company, headquartered in Carlsbad, CA, manufactures and sells golf clubs, golf balls, and golf and lifestyle apparel and accessories. The company's portfolio of global brands includes Callaway Golf, Odyssey, OGIO, TravisMathew and Jack Wolfskin. Callaway also owns the Topgolf golf entertainment business. Topgolf owns and operates 64 golfing centers in the US and 3 centers in the U.K. Revenue for the publicly-traded company, pro-forma for full year benefit of Topgolf, was $3.3 billion for the last twelve-month period ended December 31, 2021.REGULATORY DISCLOSURESFor 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. Maria Iarriccio Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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