Winnebago Industries Inc. Issuer Rating Lowered To 'B+' On Anticipated COVID-19 Impact; Outlook Negative

  • Restrictions on movement and daily life have significantly reduced the production capacity of recreational vehicles in the U.S. These restrictions will likely translate into reduced consumer demand over the coming weeks, at the very least. In addition, our economists currently forecast an economic recession in the U.S. starting in the second quarter of 2020, which will further burden consumer confidence and demand for big-ticket discretionary purchases such as RVs.
  • We are lowering the issuer credit rating on Winnebago Industries Inc. to 'B+' from 'BB-'.
  • In addition, we are lowering the issue-level rating on the secured term loan to 'BB' from 'BB+'.
  • The negative outlook reflects significant anticipated stress on revenue and cash flow over at least the next several weeks, possibly longer, which could use liquidity, materially reduce EBITDA this year even in a recovery scenario, and result in a spike in leverage. The negative outlook also reflects the possibility that we could lower the ratings over the next few months, or sooner, if we no longer believed COVID-19 containment could occur by the end of the second quarter of 2020 so that consumer activity could begin to recover.
NEW YORK (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions above. The downgrade to 'B+' reflects our updated assumption that leverage could increase to about 4x in fiscal 2020 (ending August) due to production suspensions at Winnebago leading into the busy spring selling season. The rating reflects our revised assumption that Winnebago's revenue and cash flow may decline significantly at least during the spring selling season because of a production suspension. In addition, there is a high level of uncertainty in retail demand over the next several months as the U.S. grapples with the containment of COVID-19, and the impact of an anticipated recession. Winnebago announced its decision to suspend production at most of its facilities through April 12, after which the company is likely to reassess the decision. Our current assumption is for virus containment to occur by late-second quarter of calendar 2020 at the earliest; the impact on Winnebago's revenue and cash flow could be severe until restrictions are lifted. In addition, our economists anticipate a recession to cause a severe GDP and consumer spending decline in the second quarter. We believe there could be a prolonged impact from a recession on big-ticket discretionary purchases such as RVs.

The negative outlook reflects significant anticipated stress on revenue and cash flow over at least the next several weeks, and possibly months, which could use liquidity, materially reduce EBITDA this year even in a recovery scenario, and result in a spike in leverage. The negative outlook also reflects the possibility that we could lower the ratings over the next few months, or sooner, if we no longer believed COVID-19 containment could occur by about the end of the second quarter in 2020 so that consumer activity could begin to recover.

We could lower the issuer credit rating if we believed Winnebago would sustain adjusted debt to EBITDA above 5x, which could occur if COVID-19 is not contained by the end of the second quarter, or if Winnebago's liquidity significantly deteriorates.

We could revise the outlook to stable once we gain confidence that leverage would remain below 5x, probably through a combination of an anticipated economic recovery in 2021, debt repayment, and EBITDA growth. Such an improvement in credit measures would likely reflect business stabilization after containment of COVID-19 and an improvement in economic growth in the U.S.
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