Weight Watchers International Inc.'s 2017 performance has exceeded our expectations

  • US-based weight-management services provider Weight Watchers International Inc.'s recent performance has exceeded our expectations as improving membership retention rates propel profit growth and result in stronger credit measures. We are raising our corporate credit rating on Weight Watchers to 'B' from 'B-'.
  • We are also raising our issue-level rating on the company's first-lien credit facility to 'B' from 'B-' in conjunction with the corporate credit rating upgrade; and revising the recovery rating to '3' from '4' to reflect better recovery prospects on this debt facility because of improving business fundamentals.
  • The outlook is stable, reflecting our expectations that the company will sustain its positive operating momentum, benefiting from improved digital capabilities and in-person meeting formats that should drive another successful winter recruiting season and help further strengthen debt leverage toward the low-6x area at the end of 2017.

At the same time, we raised our issue-level rating on the company's first-lien 
credit facilities, consisting of a $50 million revolving facility expiring in 
2018 and a $2.1 billion term loan due in 2020, to 'B' from 'B-'. In addition, 
we revised our recovery rating on these debt facilities to '3' from '4'. The 
'3' recovery rating indicates our expectation for lenders to receive 
meaningful (50%-70%; rounded estimate: 55%) recovery in the event of a payment 

The company's funded debt as of July 1, 2017, is about 1.9 billion. 

Our ratings upgrade reflects our belief that the company's improved operating 
performance has resulted in higher revenue and EBITDA growth ahead of our 
expectations and stronger credit measures. We now expect leverage to improve 
toward the low-6x area by the end of 2017, from about 7.3x at the end of 2016, 
and we expect Weight Watchers will generate about $100 million in free 
operating cash flows this year.

The stable outlook reflects our expectation that the company will sustain its 
recent operational improvements as it benefits from new membership growth and 
higher retention rates that will continue into the 2018 winter recruiting 
season. Furthermore, we expect the company's financial policy with respect to 
debt-financed dividends or acquisitions to be in line with our current 
expectations that leverage remains below 7x.

We could also lower our ratings if the company's operational performance 
deteriorates because of a tougher competitive environment or an unsuccessful 
2018 winter recruiting season, resulting in leverage exceeding 7.5x and 
significantly weakening the company's cash flow generation. We estimate this 
could occur if EBITDA declines about 20% from current levels, while debt 
remains constant. 

In addition, we could lower the ratings if the company's financial policies 
become more aggressive and it issues debt to fund shareholder returns. We 
estimate that about $500 million of incremental debt at current EBITDA levels 
would likely result in leverage exceeding this threshold.  

Although unlikely over the next year, we could raise our ratings if the 
company's operating performance exceeds our expectation, debt to EBITDA 
improves below 5x, and its private equity sponsor formally commits to 
sustaining this leverage or to reduce collective ownership to below 40% and 
relinquish control of the company.