Wheel Pros Rating Lowered To 'B-' On Expectations Of Weaker Demand; Debt Ratings Lowered; Outlook Negative

  • We expect demand for discretionary consumer products like custom wheels to weaken because of the coronavirus (COVID-19) as more consumers stay home. We believe there is also a rising chance of a recession stemming from the spread of the coronavirus that could impair consumer discretionary spending this year.
  • As a result, we are lowering our issuer credit rating on Wheel Pros Inc. to 'B-' from 'B'.
  • At the same time, we are lowering our issue-level ratings on the company's first-lien term loan to 'B-' from 'B' and the second-lien term loan to 'CCC' from 'CCC+'.
  • The negative outlook reflects the increased risk that cash flow will remain negative for multiple quarters, hurting liquidity. This could occur if sales and margins contract more than our current expectations for an extended period of time due to weaker demand from consumers resulting from COVID-19.
NEW YORK (S&P Global Ratings) March 17, 2020—S&P Global Ratings today took the rating actions listed above.
The downgrade and negative outlook reflect a significant anticipated loss of revenue and lower margins, at least in 2020, compared with our prior base-case estimates.   This stems from our view that demand for Wheel Pros' discretionary products will fall significantly in the near term as a result of the coronavirus. In most cases, custom wheels are put on by a professional installer, and we believe consumers will be avoiding nonessential upgrades to their vehicles outside their home. Furthermore, we believe there is a rising chance of a recession stemming from the pandemic that could pressure consumer discretionary demand that would slow recovery once the virus is contained. We believe these increasing risks will lower both revenues and margins this year. As a result, adjusted leverage will likely stay above our 6.5x threshold for a 'B' rating on Wheel Pros. The severity and longevity of the pandemic's impact on Wheel Pros is very uncertain. In our base case, we forecast Wheel Pros will still generate some free cash flow this year, but our negative outlook means there is at least a one-in-three risk demand falls significantly more, leading to negative cash flows and even higher leverage.
The negative outlook on Wheel Pros reflects the increased risk that cash flow remains negative for multiple quarters, hurting its liquidity. This could occur if sales and margins contract more than our current expectations for an extended period of time due to weaker demand from consumers resulting from COVID-19.
We could lower our rating on Wheel Pros if EBITDA contracts significantly, causing its free operating cash flow (FOCF) to remain negative for multiple quarters such that it affects liquidity, or if debt leverage worsens from current levels. This would cause us to view Wheel Pros financial commitments as unsustainable. This could occur because of weaker discretionary demand from consumers due to COVID-19 and a possible recession.
We could revise our outlook on Wheel Pros to stable if the demand and margin impact of the current COVID-19 crisis appear to be less severe, allowing the company to continue generating positive free cash flow.
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