Research: Rating Action: Moody’s downgrades Arterra Wines’ CFR to B3; outlook stable

Approximately $600 million of rated debt facilitates affected

Toronto, November 22, 2022 — Moody’s Investors Service, (“Moody’s”) has downgraded Arterra Wines Canada, Inc.’s (“Arterra”) corporate family rating (CFR) to B3 from B2 and its probability of default rating to B3-PD from B2-PD. Moody’s also downgraded Arterra’s revolving credit facility and the first lien term loan tranches to B2 from B1. The outlook remains stable.

“The downgrade of Arterra reflects the company’s underperformance relative to Moody’s expectations for the first half of fiscal 2023 due to lower volume sales and higher input costs, which has resulted increased financial leverage with debt/EBITDA above 8x,” said Moody’s analyst Dion Bate. “While Moody’s expect financial leverage to trend back towards 7x, Arterra remains vulnerable to a tighter consumer environment and ongoing cost inflation.” adds Mr Bate.

Downgrades:

..Issuer: Arterra Wines Canada, Inc.

…. Corporate Family Rating, Downgraded to B3 from B2

…. Probability of Default Rating, Downgraded to B3-PD from B2-PD

…. Senior Secured 1st Lien Term Loan, Downgraded to B2 (LGD3) from B1 (LGD3)

…. Senior Secured Revolving Credit Facility, Downgraded to B2 (LGD3) from B1 (LGD3)

Outlook Actions:

..Issuer: Arterra Wines Canada, Inc.

….Outlook, Remains Stable

RATINGS RATIONALE

Arterra’s revenue and EBITDA has declined since fiscal 2021 (ending February) due to lower volumes as consumers buying patterns shifted back to purchasing alcohol at government liquor board stores; rising input costs in packaging, labor and freight; and slow price increases. This has led to Moody’s financial leverage (adjusted debt/EBITDA which includes the shareholder loan as debt) increasing to 8.4x as of Q2 2023 from 7.1x as of fiscal 2021. Moody’s understands that management has executed on a number of initiatives which include price increases during Q1 2023; cost efficiency programs; and an increased focus on the higher margin premium wine segment to improve margins and EBITDA. As a result, Moody’s is expecting financial leverage to modestly decline toward 7x in fiscal year 2024. The slow pace of recovery is due to Moody’s expectation of a difficult consumer environment that will constrain volumes or cause consumers to trade down to more affordable lower margin wines.

Arterra’s rating is constrained by: (1) its small scale relative to rated alcoholic beverage peers; (2) exposure to foreign currency fluctuations and logistics challenges as a result of its international supply chain; (3) ongoing cost inflation and delayed price recovery; and (4) financial policy risks of private equity ownership. The rating benefits from: (1) its strong market position in the Canadian wine industry, supported by a large retail presence and a portfolio of well-known brands across various price points; (2) good demand for wine, ciders, and wine-based coolers which will support modest revenue growth; and (3) highly regulated Canadian wine industry which creates substantial barriers to entry.

Arterra has good liquidity. Sources are around C$130 million compared to uses in the form of mandatory term loan amortization of about C$10 million over the next six quarters to fiscal 2024. Sources are comprised of cash balances of around C$20 million, expectations of around C$30 million of free cash flow generation through fiscal 2024 and full availability on the company’s C$80 revolving credit facility due in November 2025. The revolving credit facility is subject to a springing maximum first lien net leverage covenant when drawings exceed 35%. Moody’s does not expect the covenant to be breached over the next 12 months, however, if the covenant were to be active, Moody’s expects that compliance would be tight. Arterra has limited ability to generate liquidity from asset sales because its assets are encumbered.

Arterra’s $445 million and C$118 million first lien term loans due in November 2027 are rated B2, one notch above the B3 CFR. This reflects the term loan’s pari-passu ranking with the company’s C$80million secured revolving credit facility, also rated B2; its first-out access to collateral; and loss absorption cushion provided by the C$102 million shareholder loan, which is considered junior debt.

The stable outlook reflects Moody’s expectations that Arterra will maintain its strong market position in the Canadian wine industry and that operating performance will gradually improve and Moody’s-adjusted leverage will stay between 7x and 8x over the next 12-18 months.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A ratings upgrade would be considered if Arterra is able to successfully execute its business plan that would improve EBITDA and margins back to pre-covid levels resulting in adjusted debt/EBITDA sustained below 7x; and maintaining adjusted EBIT/Interest above 1x.

A ratings downgrade could occur if adjusted Debt/EBITDA is sustained above 8.5x or adjusted EBIT/Interest is sustained below 1x, or if liquidity weakens.

Arterra Wines Canada, Inc., headquartered in Mississauga, Ontario, markets, produces and distributes a portfolio of wine brands through provincial liquor boards, its Wine Rack retail stores and grocery retailers.

The principal methodology used in these ratings was Alcoholic Beverages published in December 2021 and available at https://ratings.moodys.com/api/rmc-documents/360647. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of  the guarantor entity.  Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Dion Bate
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Paresh Chari
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody’s Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Source link