Boardriders Inc: Downgraded By Moody’s

Early in March 2020 , Moody’s downgraded Boardriders Inc. to “speculative grade” or Caa1 from B3. (S&P undertook similar actions). The problem ? Cash flow is expected to be negative in the short term and the company seems to be busting through a leverage covenant with its lenders. All that before we consider the impact of Covid-19 on the “sports and lifestyle” company’s business worldwide.

Boardriders exited from Chapter 11 in 2016, and was bought out by Oaktree Capital funds and went on an acquisition and expansion spree. That’s been going well, but not enough to avoid these financial troubles. Leverage is not high by the standards of the day, but timing is bad given what we know about the global impact on consumer spending from Covid-19 (unless you’re selling food and bringing it to the door).

Despite the obvious and mounting pressures on cash flow and leverage, the company’s 2024 Term Loan was still valued at par at year-end 2019. We rated the company – not knowing about the predicted covenant breach that may have actually happened in January – as CCR 2Performing. However, currently that same loan is valued at 77 cents on the dollars, from 93 cents earlier in 2020. We are downgrading Boardriders Inc. to CCR 3.

The only BDC with exposure is Great Elm (GECC), which has a $8.8mn at cost investment in the 2024 Term Loan, a position that has been growing over several quarters as the BDC adds more exposure. Whether that will turn out to be a Good Idea or not will become clearer in the next few months as we determine if the company can fix its balance sheet and work out how much sales and operations have been impacted by Covid-19. We can readily envisage a scenario where we downgrade the company further to CCR 4 – i.e. expect a loss to ultimately occur. On the plus side, though, Boardriders sold off a subsidiary this month, but we don’t know the financial impact. Finally, Oaktree Capital has the resources to support the business, but will the PE owner step forward ?