Rating Action: Moody's upgrades THOR Industries, Inc. ratings (CFR to Ba3); outlook positive
Global Credit Research - 11 Jan 2021
New York, January 11, 2021 -- Moody's Investors Service ("Moody's") upgraded its ratings for THOR Industries, Inc. ("THOR"), including the company's corporate family rating (CFR; to Ba3 from B1) and probability of default rating (to Ba3-PD from B1), and the rating on the company's senior secured term loan (to Ba3 from B2). The company's speculative grade liquidity (SGL) rating has also been upgraded to SGL-1 from SGL-2. The ratings outlook is positive.
"The upgrades reflect our expectation that consumer demand for recreational vehicles (RV) will remain strong, and that this demand combined with THOR's current record backlog, will translate into significant revenue and earnings growth and an improving set of credit metrics in 2021," says Eoin Roche, Moody's lead analyst for THOR.
"The positive outlook further incorporates our expectation of a more consistently strong operating environment during 2021, with less variability in consumer demand and less disruption for RV manufacturers, which should notably facilitate less volatility in volume throughput," added Roche.
The Ba3 CFR broadly balances THOR's significant scale and leading market positions against the cyclical and competitive nature of the RV industry that is highly vulnerable to economic downturns. The rating favorably considers THOR's strong competitive standing in North America and Europe, its portfolio of well-known brands, and the company's recreational vehicle (RV) offering that touches multiple price points and segments.
Notwithstanding significant economic disruptions in the aftermath of the coronavirus pandemic, demand for towable and motorized RVs is expected to remain healthy over the coming quarters. Moody's attributes a portion of this demand to disruptions in normal recreational travel patterns, with the ongoing emphasis on social distancing and recognition of the safety benefits of RV travel given its more "self-contained" nature. Strong demand at the retail level has resulted in sharply reduced inventory at RV dealers and a corresponding increase in backlog for RV OEMS, with THOR currently maintaining record backlog of $8.9 billion as of October 31, 2020 (versus $3 billion as of October 2019).
As of December 2020, adjusted debt-to-EBITDA was relatively well-positioned for the rating at around 2.6x, and Moody's expects further strengthening of THOR's balance sheet over the coming quarters driven by a combination of earnings growth and debt reduction such that debt-to-EBITDA will be at or below 2x by the end of 2021. Moody's expects earnings growth to drive robust cash generation and improved financial flexibility, with free cash flow-to-debt likely to comfortably exceed 15% during fiscal 2021 (ending July 2021).
The rapid spread of the coronavirus outbreak, the deteriorating global economic outlook, low oil prices and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Notwithstanding some early signs that the adverse impact of the coronavirus outbreak on THOR and the deterioration in credit quality that it triggered may be relatively short-lived and subsiding, the company remains vulnerable to shifts in market demand and consumer sentiment in these unprecedented operating conditions.
The SGL-1 speculative grade liquidity rating denotes Moody's expectation of very good liquidity over the next 12 months. Moody's anticipates robust cash generation during fiscal 2021, with free cash flow-to-debt approaching 20%. External liquidity is provided by a $750 million ABL facility that expires in 2024. Approximately $165 million was drawn in December 2020, leaving availability in excess of $550 million. Moody's expects THOR will repay borrowings under the ABL over the next few quarters. The facility contains a springing minimum fixed charge coverage ratio of 1.0x that comes into effect if availability is less than the greater of $60 million or 10% of the maximum available credit. Moody's does not expect the covenant to come into effect and anticipates adequate cushions to the extent that it does.
The positives ratings outlook reflects Moody's expectation of sustained favorable retail trends in the RV market, particularly in the US, which will augment current record order books and translate to earnings growth and improved financial metrics in 2021 and beyond.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Expectations of a sustained conservative financial policy along with a continued focus on debt reduction would be required for an upgrade. Given THOR's vulnerability to highly cyclical end markets, Moody's expects the company to maintain credit metrics that are stronger than levels typically associated with companies at the same rating level. A ratings upgrade would involve expectations of at least a stable RV retail sales environment and would also require maintenance of a good liquidity profile, along with a demonstrated ability and expectation that the company would generate consistently strong free cash flows coupled with substantial availability under the company's revolver.
A weakening of THOR's liquidity profile involving expectations of negative free cash flow or free cash flow-to-debt sustained in the low single-digits, a marked reliance on revolver borrowings or concerns about covenant compliance could result in a ratings downgrade. The loss of a major dealer or the loss of market share, or debt-financed share repurchases or acquisitions over the near-term, could also result in downward ratings actions.
The following is a summary of today's rating actions:
Issuer: THOR Industries, Inc.
Corporate Family Rating, upgraded to Ba3 from B1
Probability of Default Rating, upgraded to Ba3-PD from B1-PD
Senior Secured Bank Credit Facilities, upgraded to Ba3 (LGD4) from B2 (LGD4)
Speculative Grade Liquidity Rating, upgraded to SGL-1 from SGL-2
Outlook, changed to Positive, from Stable
THOR Industries, Inc., headquartered in Elkhart, Indiana, is a leading designer and manufacturer of recreational vehicles including travel trailers, fifth wheels, specialty trailers, motorhomes, caravans, and campervans. The company primarily operates in North America and Europe and sells its products under brands such as Keystone, Airstream, Heartland, Jayco, Thor Motorcoach, Hymer, and Niesmann Bischoff. Estimated reported revenues for the twelve months ended October 2020 are about $8.5 billion.
The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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.
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Eoin Roche VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Russell Solomon Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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