Sports Authority Inc. is facing a default or distressed debt exchange as borrowings by the retailer of sporting goods overwhelm its earnings, Moody’s Investors Service said in a new report.
The company’s $300 million term loan, due November 2017, “effectively became current” on Feb. 2 because the company, controlled by Leonard Green & Partners LP, hasn’t refinanced a subordinated obligation that matures in less than a year, Moody’s said.
It’s the second time in less than a year that the investor service and ratings company downgraded Sports Authority. In June, it dropped the company’s outlook to negative.
The loan becomes immediately payable Feb. 2 if the retailer’s $350 million subordinated borrowing remains outstanding on that day, Moody’s report said.
Because that date is less than a year away, the liability is considered a short-term, or current, obligation by accounting standards. A struggling company is at risk of losing its status as a going concern when it has significant debt maturities within a year.
Moody’s said a measure of Sports Authority’s debt burden climbed to 8.25 times its earnings. That calculation adjusts for the company’s store leases.
“At these operating levels, Sports Authority’s capital structure is unsustainable over the longer term, and the risk of a default, including a distressed exchange, is high given the upcoming maturities,” Moody’s analysts, led by Michael Zuccaro, said in the statement.
Janet Reinhardt, a spokeswoman for Sports Authority at ICR Inc., said she couldn’t immediately comment. Calls by The Denver Post to the company’s Englewood headquarters were not returned immediately.
The retailer stopped publicly reporting its results after it was taken private in 2006, according to data compiled by Bloomberg.
Moody’s last week reduced its rating on Sports Authority to Caa1, three levels lower than its previous B3. A Caa1 grade indicates a company has “very high credit risk” and “poor standing.” The rating carries a “negative” outlook.
The term loan was quoted at 87.81 cents on the dollar to yield 12.82 percent last week, according to prices compiled by Bloomberg. While that’s up from a Feb. 6 low of 85.63 cents, the obligation traded above face value in September.
The debt downgrade does not impact the company’s stadium sponsorship in Denver, according to Metropolitan Football Stadium District spokesman Matt Sugar.
The company’s naming-rights contract runs through 2020, and it has not missed any annual payment of $3.5 million, Sugar said.
The company was acquired by a group led by Leonard Green for about $1.3 billion. The private-equity firm typically invests in retailers, with stakes in such companies as Shake Shack Inc., the hamburger restaurant chain. It also led the $2.8 billion acquisition of BJ’s Wholesale Club in 2011.
Denver Post staff writer David Migoya contributed to this report.
