Badger Finance LLC Downgraded To 'CCC' On Tight Liquidity, Outlook Negative

  • U.S.-based Badger Finance LLC's operational performance continues to be weaker than we expected due to a lack of significant new business wins in its ready-to-drink (RTD) segment. This, combined with the company's substantial fixed overhead costs, has increased its leverage to 12x for the last 12 months and led it to generate negative free operating cash flow.
  • We are lowering our issuer credit rating on Badger to 'CCC' from 'B-' because we envision a default scenario occurring over the next 12 months.
  • At the same time, we are lowering our issue-level rating on the company's first-lien term loan to 'CCC' from 'B-'. The '3' recovery rating remains unchanged, indicating our expectation for meaningful (50%-70%; rounded estimate: 50%) recovery in the event of a payment default.
  • The negative outlook reflects the risk that we could lower our ratings on Badger if we believe a default scenario, such as a balance sheet restructuring or covenant default, is inevitable over the next 6-12 months.
NEW YORK (S&P Global Ratings) Aug. 26, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade reflects Badger's inability to increase its revenue and profitability, which has caused its liquidity to deteriorate. We now envision a default scenario occurring over the next 12 months. The company continues to underperform our expectations because it has been unable to win significant new customers for its RTD Horseshoe business, which led to excess overhead costs and reduced its EBITDA margins to the low-double-digit percent area in the second quarter of 2019 (from the mid-twenties percent area a year ago). Badger's declining profitability has caused its leverage to increase to 12x, from 5.2x a year ago, which is a level that we view as unsustainable. We do not believe the company will be able to reduce its elevated leverage absent favorable changes in its business conditions.
The negative outlook reflects that we could lower our ratings on Badger within the next 6 to 12 months if its liquidity position continues to weaken such that we view a default as imminent.
We could lower our ratings on Badger if we believe the company will run out of liquidity, restructure its debt balance whereby it repurchases its debt at less than par or conducts a distressed exchanged, or fails to meet its 1x fixed-charge coverage ratio in the next 6-12 months.
We could revise our outlook on Badger to stable or raise our ratings if it improves its financial performance or its sponsor contributes additional equity such that the company's liquidity situation improves and we no longer envision a near-term default scenario. This could occur if the company generates greater operating leverage at its Horseshoe facility or achieves significant customer wins in its Trilliant business.
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