Rating Action: Moody's changes Traeger's outlook to negative; affirms B3 CFRGlobal Credit Research - 16 Aug 2022New York, August 16, 2022 -- Moody's Investors Service ("Moody's") affirmed TGP Holdings III LLC's (Traeger) ratings including its Corporate Family Rating (CFR) at B3, Probability of Default Rating (PDR) at B3-PD, and the B3 rating of the company's senior secured first lien credit facility. The first lien credit facility consists of a $125 million first lien revolver due 2026, a $510 million original amount first lien term loan due 2028, and a $50 million delayed draw first lien term loan due 2028. Moody's downgraded the company's Speculative Grade Liquidity rating to SGL-3 from SGL-2 and the outlook is negative.The negative outlook reflects Traeger's very high financial leverage due to the company's continued deterioration of profitability and cash flows amid a challenging operating environment and weakening consumer demand. The company expects to report revenue for fiscal year 2022 of $640 - $660 million, a year-over-year decline of -16% to -18.5%. Traeger also expects its company-adjusted EBITDA in fiscal 2022 at $35 - $45 million, or a year-over-year decline of -58% to -68%. The company's previous revenue and company-adjusted EBITDA guidance for fiscal 2022 was $800 - $850 million and $70 - $80 million, respectively. Traeger is experiencing significantly lower consumer demand for its grill products, particularly at price points below $1,000. As a result, Traeger reported a -25% sales decline in its grills segment for the second quarter of 2022 versus prior year. Ongoing inflationary pressures on consumer spending along with a shift in spending towards categories such as travel is negatively impacting retail traffic and demand for outdoor grills. In addition, high inventory levels of grills in the retail channel due to lower than expected sell through during the peak selling season is negatively impacting replenishment order activity. As a result of the meaningfully lower revenue and EBITDA expectations, Moody's projects Traeger's credit metrics will materially deteriorate in fiscal 2022 and into fiscal 2023, with debt/EBITDA expected to increase to 15x.Given the lower revenue expectations Traeger implemented several cost savings initiatives, including workforce reduction and expense control. In addition, the company suspended operations of its Traeger Provisions business, which was unprofitable. The company expects to realize annualized cost savings of approximately $20 million from these initiatives. Traeger is also working to reduce its grill inventory levels both on hand and in the retail channel, and is materially lowering production volumes in its Asian manufacturing facilities and its suspending its plan for production in Mexico.Moody's expects the shift in consumer spending from goods to services and from discretionary to non-discretionary to persist into 2023 and make it difficult for the company to meaningfully improve operating performance. In addition, the lower consumer sentiment due to challenging macro-economic conditions could also pressure consumer demand at higher-price points, further reducing revenue and earnings.The downgrade of Traeger's Speculative Grade Liquidity to SGL-3 reflects Moody's expectation for negative free cash flows in fiscal 2022 due to lower earnings and higher than normal inventory levels at year end 2022. The company's adequate liquidity is aided by the mostly undrawn $125 million first lien revolver due 2026, and the company's recent covenant amendment that increased the revolver's springing first lien net leverage financial maintenance covenant to 8.5x from 6.2x until the second quarter of 2023. The covenant amendment provides financial flexibility to utilize the revolver to fund anticipated working capital seasonality.The ratings affirmation reflects that Traeger's earnings over the next 12 months are expected to remain at a level that covers its debt service requirements and sustains its capital structure, and that the company's adequate liquidity over the next 12 months provides time to improve operating results and cash flow generation. However, execution risks are heightened by Traeger's high business and cash flow seasonality. Cost inflation or consumer demand trends could worsen during periods of high seasonality and increasing economic uncertainty.Affirmations:..Issuer: TGP Holdings III LLC.... Corporate Family Rating, Affirmed B3.... Probability of Default Rating, Affirmed B3-PD....Senior Secured 1st Lien Term Loan, Affirmed B3 (LGD4)....Senior Secured 1st Lien Delayed Draw Term Loan, Affirmed B3 (LGD4)....Senior Secured 1st Lien Revolving Credit Facility, Affirmed B3 (LGD4)Downgrades:..Issuer: TGP Holdings III LLC.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2Outlook Actions:..Issuer: TGP Holdings III LLC....Outlook, Changed To Negative From StableRATINGS RATIONALETraeger's B3 CFR broadly reflects its very high financial leverage and Moody's expectations that debt/EBITDA will increase to over 15x by the end of fiscal 2022. The discretionary nature of outdoor grills and Traeger's relatively expensive grills and accessories products, exposes the company to cyclical changes in consumer discretionary spending. High inflation and lower consumer sentiment is weakening consumer demand for outdoor grills and is materially and negatively impacting the company's profitability and cash flows. Moody's expects these pressures to persist into 2023. The company has modest relative scale with annual revenue under $800 million, and has narrow product focus, and limited geographic diversification. Traeger has high customer concentration and its cash flows are highly seasonal centered around the summer months.Traeger's rating also reflects its solid market position within the niche wood pellet grill industry, and its strong brand image supported by its good track record of product innovation. The company benefits from the recurring nature of its sizable consumables segment that is more resilient to cyclical downturns, and its growing installed base. Traeger also benefits from its growing direct to consumer business and increased distribution in the grocery channel. The company's Speculative Grade Liquidity of SGL-3 reflects Moody's view that the company will maintain adequate liquidity over the next 12 months, supported by a mostly undrawn mostly undrawn $125 million revolving facility, which provides financial flexibility to fund seasonal investments in working capital.Traeger's relies on raw materials primarily steel as part of the manufacturing process of its products. The company is exposed to the carbon transition and waste and pollution risks related to the energy intensive metal production, as well and transport, handling and disposal of its products. However, cost increases can generally be passed on to the consumers.Social risk factors reflect the company's exposure to challenges related to responsible production and supply chain management risks because the company sources its grills and accessories from suppliers primarily located in China and Vietnam. An extended supply chain disruption from situations such as the port backups or coronavirus would adversely affect the company's revenue and EBITDA. The company is also exposed to changes in consumer discretionary spending and changes in consumer trends such as food at-home and away-from home.Traeger is highly exposed to governance risks mainly driven by its concentrated ownership by private equity sponsors, and the company's financial strategy that includes operating with high leverage. Funds affiliated with AEA Investors, Ontario Teachers' Pension Plan Board, and Trilantic Capital Partners maintain a controlling ownership interest in the company following the July 2021 initial public offering (IPO). Moody's expects financial policies to be somewhat less aggressive following the IPO including proceeds used to reduce debt, but leverage remains high given the company's reliance on cyclical discretionary consumer spending. Concentrated decision making under private equity control creates potential for event risk and decisions that favor shareholders over creditors.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe negative outlook reflects Traeger's meaningful deterioration in profitability, cash flows, and credit metrics, and Moody's view that the capital structure could become unsustainable if the company is unable to improve profitability towards historical levels in fiscal 2023.The ratings could be upgraded if the company demonstrates consistent organic revenue growth along with EBITDA margin expansion towards historical levels, generates consistently good positive free cash flow with good levels of reinvestment, and sustains debt/EBITDA below 5.0x. A ratings upgrade would also require the company maintaining at least good liquidity and Moody's expectations of balanced financial policies that sustains credit metrics at the above levels.The ratings could be downgraded if the company's operating performance including the EBITDA margin does not improve, or free cash flow remains negative. The ratings could also be downgraded if liquidity deteriorates for any reason including limited availability on the revolver facility, or if the risk of an event of default increases.Headquartered in Salt Lake City, Utah, TGP Holdings III LLC (Traeger) is a designer and distributor of wood pellet grills, grill accessories and related consumables. Traeger reported revenue of $760.9 million for the twelve month period ending 30 June 2022 and its largest market is North America (94% of fiscal 2021 sales). Following the July 2021 initial public offering (IPO) of Traeger, Inc., funds affiliated with AEA Investors, Ontario Teachers' Pension Plan Board, and Trilantic Capital Partners maintain a controlling 64.5% interest in the company. Traeger, Inc. is the indirect parent of TGP Holdings III LLC, and its common stock is listed under the ticker symbol "COOK".The principal methodology used in these ratings was Consumer Durables published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74987. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.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. 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