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Rating Action: Moody's upgrades Winnebago ratings (CFR to B1); outlook positive
Global Credit Research - 11 Jan 2021
New York, January 11, 2021 -- Moody's Investors Service ("Moody's") upgraded its ratings for Winnebago Industries, Inc. ("Winnebago"), including the company's corporate family rating (CFR; to B1 from B2) and probability of default rating (to B1-PD from B2-PD), and the rating on the company's senior secured notes due 2028 (to B1 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 follow Winnebago's demonstrated operational resilience during the COVID pandemic and reflect our expectation of continued strength in retail demand for recreational vehicles and ensuing strength in the company's financial performance over the forward period," according to Eoin Roche, Moody's lead analyst for Winnebago.
"We expect this ongoing demand to broadly support healthy earnings growth, strong free cash flows and an improving set of key credit metrics, which combined will enhance the company's underlying financial flexibility," added Roche.
The B1 CFR broadly reflects the highly cyclical nature of the RV and motorboat industries and a competitive operating environment with limited barriers to entry against Winnebago's strong brand name, well-established market position and opportunities for improved profitability. The rating also considers Winnebago's track record of strong execution along with a history of deleveraging after previous debt-financed acquisitions.
Moody's recognizes Winnebago's relatively conservative financial policy for its assigned rating, as reflected by a comparatively strong balance sheet with adjusted debt-to-EBITDA of around 2.7x and ample cash balances of $273 million as of November 2020. Low dealer inventory levels and near record backlog of around $2.6 billion bode well for strong sales and earnings growth in 2021, notwithstanding ongoing economic disruption in the aftermath of the coronavirus pandemic.
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 Winnebago 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 signifies Moody's expectation of very good liquidity over the next 12 months. Cash balances as of November 2020 were robust at around $273 million and Moody's expects healthy cash generation during fiscal 2021 (ending August 2021), with free cash flow-to-debt likely to exceed 15%. External liquidity is provided by a $193 million ABL facility that expires in October 2024, and Moody's anticipates near full availability under the facility during fiscal 2021. The ABL contains a minimum fixed charge coverage ratio of 1.0x that is effective if availability is less than the greater of 10% of the revolving commitment or $19.2 million. Other alternative sources of liquidity are limited given the predominately all-asset pledge benefiting the company's various secured creditors.
The positive ratings outlook reflects Moody's expectation of continued strong retail demand for RVs as well as robust levels of backlog that should support healthy sales and earnings growth and improving credit metrics in fiscal 2021 and beyond.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
In light of the high degree of cyclicality inherent in Winnebago's end markets, Moody's expects the company will maintain key credit metrics that are meaningfully stronger than levels typically associated with other companies at the same rating level. Consideration for a ratings upgrade could be warranted if retail RV registrations and/or wholesale deliveries stabilize and grow modestly over the next few quarters. A larger and more diversified product offering that reduces the cyclicality of the overall business would be constructive to any prospective consideration of higher ratings, as well. A ratings upgrade would require maintenance of a good liquidity profile and a demonstrated ability and expectation that the company would generate consistently strong free cash flows coupled with substantial availability under the revolver.
A weakening liquidity profile involving increased reliance on the company's asset-backed revolver or expectations of negative free cash flow would pressure the ratings downward. The loss of a key dealer or the erosion of market share, expectations of a meaningful weakening of retail demand, debt-financed acquisitions, and/or share buybacks over the near-term could also warrant consideration of prospectively lower ratings.
The following is a summary of today's rating actions:
Issuer: Winnebago Industries, Inc.
Corporate Family Rating, upgraded to B1 from B2
Probability of Default Rating, upgraded to B1-PD from B2-PD
Senior Secured Notes due 2028, upgraded to B1 (LGD3) from B2 (LGD3)
Speculative Grade Liquidity Rating, upgraded to SGL-1 from SGL-2
Outlook, changed to Positive, from Stable
Winnebago Industries, Inc., headquartered in Forest City, Iowa, is a leading manufacturer of RVs used primarily in leisure travel and outdoor recreational activities. Winnebago manufactures a variety of motor homes, travel trailers and fifth wheel trailers, as well as recreational powerboats. Revenues for the twelve months ended November 2020 were approximately $2.2 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.
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.
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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