Compass Group Diversified Holdings LLC Ratings Affirmed As Investment Appetite Moderates

Rating Action Summary:

Trust metric by Artificial Intelligence: 88 out of 100 with 200 metrics

  • U.S.-based Compass Group Diversified Holdings LLC (CODI) recently sold its stake in Manitoba Harvest, which has resulted in its loan-to-portfolio-value (LTV) improving to around 45%.
  • We believe CODI will maintain a more conservative investment policy over the next year due to very high acquisition multiples generally seen in markets today and the potential for an economic downturn over the near term.
  • We affirmed our 'B+' issuer credit rating on CODI. The outlook is stable. We also affirmed our 'BB' issue-level rating on its senior secured revolver and term loan B and our 'B-' issue-level rating on its senior unsecured notes.
  • The stable outlook reflects our view that CODI will likely sustain an LTV around 45% over the next year.
CHICAGO (S&P Global Ratings) April 22, 2019—S&P Global Ratings today took the rating actions listed above. The affirmation reflects our expectation for CODI to sustain LTV around 45% over the next year. The company will have significant capacity under its revolver to make new acquisitions after applying proceeds from the sale of Manitoba Harvest to debt reduction. However, we expect CODI will maintain a more cautious investment strategy over the next year due to very high acquisition multiples generally seen in markets today and management's concerns over a potential near-term recession, especially since many of the company's investees are small and vulnerable to economic downturns. CODI will likely continue to seek tuck-in acquisition opportunities for its existing subsidiaries, but the company is less likely, in our view, to make a large platform investment in the near term. Nevertheless, we believe the company's long-term investment policy is unchanged and that LTV will likely hover around or above 45% over a longer horizon.
The stable outlook reflects our expectation that CODI will maintain a slightly more conservative investment policy over the next year, likely sustaining LTV around 45%. We expect the company will be more guarded about making large platform acquisitions over the next year given high acquisition multiples and the potential for a recession in the near term. It also reflects the company's poor asset liquidity because of its lack of listed assets and weak credit quality of its portfolio, which is limited to small, privately held middle market companies. We expect CODI will continue to receive sufficient interest income from its investee companies to cover its own obligations, though discretionary cash flow will likely be negative.
We could lower the rating if LTV deteriorates and is sustained above 60% for an extended period. This could be the result of a more aggressive financial policy or a permanent erosion in portfolio value due to inherent weakness in CODI's investee companies. We could also lower the ratings if portfolio diversity materially weakens or if we reassess our view of the creditworthiness of one or more of its larger investments.
While unlikely over the next 12 months, we could raise the rating if CODI meaningfully improves its portfolio liquidity through ownership of publicly held investments (either through initial public offerings of existing investments or through new investments) and it adopts a more conservative financial policy such that we believe it will sustain LTV below 30%.
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