NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a first-time 'BBB' Long-Term Issuer Default Rating (IDR) to Brunswick Corporation (Brunswick, NYSE: BC) and first-time 'BBB' issue-specific long-term ratings to Brunswick's senior unsecured credit facility and senior unsecured notes. The Rating Outlook is Stable.
The rating reflects BC's strong competitive positions in its marine and fitness segments, low leverage and improving business mix towards less cyclical marine parts and accessories and fitness businesses. Fitch believes BC is in a stronger position today to weather a downturn relative to the last recession. However, cyclical boat and engine sales still comprise approximately 55% of the company's total sales.
LESS VOLATILE BUSINESS MIX
BC has a portfolio of well-recognized brands with leading market positions in its business segments. The company has a track record of product leadership and innovation through R&D spending that has enabled it to anticipate and adapt to changing customer preferences. BC has also enhanced its product portfolio through strategic acquisitions, such as Cybex International (fitness equipment) and Indoor Cycling Group (group exercise). Fitch expects BC to remain acquisitive, initially targeting its less cyclical marine parts and accessories and fitness businesses in order to expand its product lines.
BC has taken several actions to reduce the cyclicality of its business mix, following a high degree of volatility during the last recession when the company's EBITDA turned negative during 2009. For example, BC exited unprofitable (primarily boat) product lines, consolidated its manufacturing footprint, and reduced dealer distribution channel inventories. The divestiture of BC's small, labor and capital intensive bowling business in 2014 also improved the operating profile.
The company remains committed to the Boat business, albeit on a smaller scale, as it creates a level of demand for its engines and BC has a strong portfolio of brands (including Boston Whaler and Sea Ray). Inboard/sterndrive boats and engines - historically the company's most volatile business line - represents roughly 15% of total sales today, down from approximately 40% of total sales in 2007.
BC's greater strategic emphasis on its less cyclical Fitness and Marine Engine segments (specifically marine parts and accessories [P&A]) is a key credit positive due to the relatively less volatile and/or discretionary product demand profiles relative to boats. BC generates the majority of its division operating profit before depreciation and amortization from its Fitness (23%) and Marine Engine (64%) segments, which should be more stable in a recession. The company does not break out profitability within the Marine Engine segment between engines and P&A.
Select Marine Engine segment sales are still tied to the recreational boating industry through new engine sales and BC's Boat segment remains a meaningful customer of BC's engines (over 10% of Marine Engine segment sales). However, BC has been growing and reinvesting in its marine P&A and distribution businesses, which have a more stable end demand environment than that of new boat sales. As a result, BC has established a market leading P&A position in an otherwise fragmented market of small players with limited offerings.
Fitch has a favorable view of BC's Fitness segment, given its performance through the last recession and BC's strong market position and brands. The commercial fitness equipment market is not as fragmented as the highly competitive health club operator market. BC's focus on various end users within the fitness segment (commercial, consumer, rehabilitation, recreation, corporate well-being, and group exercise) gives BC some degree of diversification and exposure to many types of varying trends and preferences. Fitch believes the health club industry (a large customer base for BC) still has room for growth in terms of memberships and penetration, despite the gains seen over the last decade.
STRONG CREDIT PROFILE
Debt reduction, EBITDA growth, and interest savings have strengthened BC's credit profile since exiting the last recession. The company has reduced debt by over $400 million from its peak of $906 million in the third quarter of 2009. This, along with refinancing higher cost borrowings, has helped lower its annual cash interest expense by approximately $60 million to $29 million in 2015. As of June 30, 2016, leverage was at a 10-year low of 0.8x and interest coverage was nearly 20x. The current maturity schedule also gives BC more flexibility to withstand a downturn, which is in contrast to the prior recession when approximately $400 million in debt was coming due from 2009-2011.
BC generates adequate cash flow and liquidity to grow its Fitness and Marine Engine segments through internal and external investments while maintaining its credit profile. Fitch believes the market for additional M&A is also limited in terms of size, with few large-scale targets.
BRUNSWICK ACCEPTANCE CORP.
Fitch primarily considers the risk to BC's credit profile from Brunswick Acceptance Company (BAC) in its liquidity risk analysis, rather than as an adjustment to the company's consolidated financials and/or leverage.
BAC is a joint venture (JV) between Brunswick (49% ownership) and Wells Fargo Distribution Finance Corporation (Wells Fargo) (51%) that provides dealer floorplan financing to many of Brunswick's domestic boat and engine dealers. BC accounts for its ownership as an unconsolidated equity investment. The JV is funded with partner equity, a $1 billion secured borrowing facility, and a receivables securitization facility. There are no guarantees or explicit support agreements between BC and BAC. Fitch does not rate BAC.
Fitch would expect BC to financially support BAC if necessary during periods of economic and capital markets stress to ensure continued floorplan financing for its dealers. BAC's operations are strategically important to BC. The inventory funding BAC provides to BC's dealers helps drive new boat and engine sales and enables the company to monitor the health of its network of independent dealer distributors.
Although not anticipated, Fitch views the exit (and inability to replace) Wells Fargo from the JV as the most significant BAC-related risk to BC's credit profile. However, Fitch believes BC is adequately capitalized to navigate the potential financial impact of supporting BAC under a range of scenarios and this risk is adequately captured in the 'BBB' IDR. BAC retained access to its funding through the last recession and did not require any material support from BC.
Fitch's key assumptions within the rating case for Brunswick include:
--Revenues grow in the mid-to-high single digit range through the four-year projection horizon, driven primarily through organic growth in the Marine Engine and Fitness segments, as well as through bolt-on acquisitions;
--EBITDA margins expand modestly from current levels thanks to growth in the higher margin P&A and Fitness businesses;
--Capex slightly higher than previous years to support growth in the Marine Engine and Fitness segments;
--Modest dividend increases of 5% per year and share repurchases of $100 million per year;
--Over $250 million in acquisitions in 2016 (Cybex, Thunder Jet, Indoor Cycling Group) and $100 million per year thereafter;
--Pension contributions steady at $70 million per year.
Positive: Upward rating momentum is unlikely given the inherent boating industry cyclicality. However, Fitch would consider upgrading BC's ratings and/or Outlook if the agency takes a more favorable view towards BC's through-the-cycle cash flow volatility. This could occur if BC exceeds Fitch's performance expectations during a downturn (e.g. less than 50% EBITDA decline in a severe downturn) and/or through further revenue diversification away from the Boat segment into less cyclical businesses, such as Fitness and P&A.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A severe downturn in global boating demand;
--Inability to sustain leverage at, or below 1.5x through the business cycle;
--A shift towards a more aggressive financial policy or shift in business strategy, such that the Boat segment becomes a more meaningful portion of total company sales;
--A need for BC to provide material support to BAC.
The ratings have some tolerance for BC to operate with leverage of above 1.5x to 2.0x for a strategic acquisition or during an moderate industry downturn, provided that Fitch expects leverage to return to 1.5x or below during the one-to-two year Outlook horizon.
BC has ample liquidity on hand between $493 million in cash and nearly full availability under its $300 million revolving facility. The company does not disclose its overseas cash balance. Fitch expects BC to generate $150 million - $300 million in annual FCF through 2019, supporting its liquidity profile. Capex, acquisitions, and shareholder returns are the company's most likely capital use avenues for its cash flow from operations. BC has minimal debt maturities through 2020.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
--IDR 'BBB', Stable Outlook;
--Senior unsecured credit facility 'BBB';
--4.625% senior unsecured notes due 2021 'BBB';
--7.375% senior unsecured notes due 2023 'BBB';
--7.125% senior unsecured notes due 2027 'BBB'.
Date of Relevant Rating Committee: Aug. 23, 2016
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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