Kontoor Brands Inc. Rated 'BB-' On Spinoff From VF Corp.; Debt Rated; Outlook Stable


  • Greenboro, N.C.-based Kontoor Brands Inc. will become a separately traded public company following the spinoff from VF Corp. in May 2019. The company's operations will consist of VF's Jeanswear business, including the Wrangler and Lee brands.
  • The company is proposing a $1.55 billion senior secured credit facility to fund a $950 million one-time cash transfer to member's of VF's group and $100 million in cash for operational needs. Given the proposed capital structure, we estimate leverage in the low-3x area at the end of 2019.
  • We are assigning our 'BB-' issuer credit rating to Kontoor. At the same time, we are assigning our 'BB-' issue-level rating and '3' recovery rating to the proposed credit facility, reflecting our expectation for meaningful (50%-70%; rounded estimate: 60%) recovery for lenders in the event of a default.
  • The stable outlook reflects our expectation that Kontoor will maintain leverage around 3x and funds from operations (FFO) to debt in the low- to mid-20% area as it operates as a stand-alone entity and invests in digital capabilities and geographic expansion to revitalize sales growth.
CHICAGO (S&P Global Ratings) April 23, 2019--S&P Global Ratings today took the 
rating actions listed above. Our ratings on Kontoor reflect its relatively 
good market position as the No. 2 player with approximately 3% of the highly 
competitive and fragmented U.S. denim apparel market. Market leader Levi's has 
only approximately 5%. The ratings also incorporate potential operational 
challenges in separating from VF and establishing itself as a stand-alone 
company. Efforts to restructure the business, by streamlining the supply chain 
and establishing key corporate functions, could disrupt operations and impair 
supplier and customer relationships.  

The stable outlook reflects our view that the company's spinoff will be 
successful, and that it will maintain leverage around 3x and FFO to debt in 
the low- to mid-20% area over the next year. We expect the company to invest 
in its digital capabilities and geographic expansions to stem the decline in 
its wholesale channels, and generate about $70 million-$90 million 
discretionary cash flow for debt reduction.

We could raise our ratings if Kontoor successfully completes the spinoff, 
improves debt to EBITDA toward the mid-2x area, and strengthens FFO to debt 
above 30%. In addition, the company would need to reverse negative sales 
trends and demonstrate modest top-line growth while sustaining adjusted EBITDA 
margins at about 15%-16%. We estimate that EBITDA would need to improve by 
about 20% or FFO by about 25%. We believe the company could achieve this by 
investing in its digital channels and international expansion while 
stabilizing its declining U.S. segment and establishing its stand-alone key 
corporate and supply chain functions as planned.

We could lower our ratings if the separation process from VF leads to 
significantly higher stand-alone costs or operational disruption such that the 
company cannot return Wrangler and Lee to growth. These operational challenges 
would likely result in the company's credit metrics deteriorating 
significantly, with debt to EBITDA exceeding 4x. We estimate EBITDA would need 
to decrease by 35% for this to occur. We could also lower our ratings if the 
company's financial policy becomes more aggressive, with excessive shareholder 
returns or acquisitions such that leverage exceeds 4x. We estimate debt would 
need to increase by $400 million at current EBITDA for this to occur.  
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