CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB-' rating to Levi Strauss & Co.'s (Levi) $475 million issue of senior unsecured notes. The proceeds from the issue, together with revolver borrowings, will be used to repay the company's $525 million of 7.625% senior notes due 2020. The Rating Outlook is Positive. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The rating and Positive Outlook reflects Fitch's view that Levi will begin to generate EBITDA growth as the benefits from its global productivity initiative flow to the bottom line, particularly in fiscal 2016. In addition to taking significant costs out of the business, Levi's management is also committed to reducing debt levels and strengthening its balance sheet. These factors are expected by Fitch to drive adjusted leverage toward the low-3x range over the next two years from 3.6x currently. Fitch also expects FCF will be positive in the range of $200 million annually excluding restructuring costs. The rating continues to reflect Levi's well-known brands, strong market shares, and geographic diversity, as well as the challenging consumer environment pressuring top line performance.
Levi's revenues declined 1.3% on a constant currency basis in the first quarter ended March 1 2015, following 2.6% constant currency growth in fiscal 2014 (ended November). This reflects sales declines in the Americas region (60% of 2014 revenues), due in part to a shift in the company's fiscal calendar partly offset by growth in Europe (24% of 2014 revenues) and Asia (16% of 2014 revenues). Fitch projects consolidated sales will be flat to up in the low single digit range over the next 24 months, and will continue to be constrained by the difficult consumer environment globally.
Levi's EBITDA margin was 12.1% in the 12 months ended March 1, 2015 compared with 12.5% in 2014, due to increased investment in advertising, higher sourcing costs, and the promotional selling environment. In the beginning of 2014, Levi's rolled out a restructuring initiative where actions taken to date are expected to produce annual net savings of $125 million - $150 million. Fitch believes that EBITDA will continue to be constrained over the near term by the strong dollar and costs associated with the company's restructuring activities, but that it will move higher over the next 24 months to over $600 million from $564 million in the LTM ended March 1, 2015, as cost savings flow to the bottom line.
Leverage (adjusted debt/EBITDAR) was 3.6x at March 2015 compared with 4.0x at fiscal year-end 2013, due to $420 million of debt reduction. Fitch expects management will continue to reduce debt levels with free cash flow in 2015-2016, and that leverage will improve toward the low-3x range over the next two years.
Liquidity is supported by cash of $203 million and availability of $717 million on an $850 million credit facility that expires in March 2019. The facility is secured by North American inventories, receivables, and the U.S. Levi trademark, with a total borrowing base of $776 million.
--Fitch expects consolidated sales to be flat to up in the low single digit range over the next 24 months, and will continue to be constrained by the difficult consumer environment globally.
--Fitch expects EBITDA to be constrained over the near term by the strong dollar and the company's ongoing restructuring activities, but that it will move higher over the next 24 months to over $600 million from $564 million in the LTM period ended March 1, 2015.
--Fitch expects FCF to be positive in the range of $200 million annually excluding restructuring costs.
--Fitch expects management will continue to reduce debt levels with free cash flow in 2015-2016, and that leverage will improve toward the low-3x range over the next two years.
Factors that could individually or collectively lead to a positive rating action include:
--EBITDA margins begin a sustained recovery in 2015;
--FCF of $200 million plus annually, permitting ongoing debt reduction;
--Adjusted financial leverage improves sustainably to the low-3x range.
Factors that could individually or collectively lead to a negative rating action include:
--EBITDA margins remain under pressure longer-term;
--Sales trends remain soft;
--Adjusted financial leverage moves above the mid-4x range.
Fitch currently rates Levi as follows:
Levi Strauss & Co.
--$850 million secured revolving credit facility 'BB+';
--Senior unsecured notes 'BB-'.
The Rating Outlook is Positive.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage