Callaway Golf Co. Assigned 'BB-' Issuer Credit Rating; Outlook Stable; Debt Ratings Assigned

  • Carlsbad, Calif.-based golf equipment manufacturer Callaway Golf Co. (Callaway) plans to acquire Germany-based outdoor apparel, footwear, and equipment company Jack Wolfskin using the proceeds from a proposed $476 million senior secured term loan B.
  • We assigned our 'BB-' issuer credit rating to Callaway.
  • We also assigned our 'BB-' issue-level rating and '3' recovery rating to the proposed term loan. Our '3' recovery rating reflects our expectation for meaningful (50%-70%; rounded estimate: 65%) recovery for lenders in the event of a default.
  • The stable outlook reflects our expectation for Callaway to proactively repay debt in order to maintain leverage around the 3x area in 2019, despite an EBITDA decline in 2019 due to investments to support future growth at Jack Wolfskin. We expect EBITDA growth and debt repayment in 2020 will result in leverage improving to the mid-2x area.
NEW YORK (S&P Global Ratings) Dec. 6, 2018—S&P Global Ratings today took the 
rating actions listed above. The 'BB-' rating on Callaway primarily reflects 
moderate leverage, the company's participation in the highly competitive golf 
equipment industry, the discretionary nature of golf equipment sales, 
relatively high profit volatility, and limited revenue visibility. The golf 
market is mature and has faced challenging participation trends over the last 
decade. The company's planned acquisition of Jack Wolfskin could increase 
volatility of its earnings as we view the lifestyle and outdoor apparel 
markets as very competitive and fragmented. In addition, there is some 
integration risk related to the proposed acquisition. However, the company 
benefits from a strong brand and leading market share in the golf equipment 
industry, a track record of successful new product introductions over the last 
several years, and good geographic diversification. 

The stable outlook reflects our expectation that the company will achieve 
modest performance gains as it benefits from its good market position in the 
golf industry and that the company will smoothly integrate the planned 
acquisition, while maintaining debt leverage at or below 3x.  

We could consider a higher rating once we are confident that Callaway will 
successfully integrate Jack Wolfskin while achieving modest sales growth for 
the brand without materially higher investment spending than we currently 
expect. Higher ratings are also dependent on Callaway exercising financial 
discipline by proactively repaying debt and reducing leverage to under 3x by 
2020.

We could consider lower ratings if we believe Callaway will sustain 
lease-adjusted debt to EBITDA at or above the high-3x area, which would likely 
result from significantly higher-than-expected investments required at Jack 
Wolfskin, or if the company makes additional debt-financed acquisitions before 
building in additional leverage capacity.