Pure Fishing: Downgraded by Moody’s

Pure Fishing is a leading seller of “fishing tackle, lures, rods and reels with a portfolio of brands that includes Abu Garcia®, All Star®, Berkley®, Chub®, Fenwick®, Greys®, Hardy®, Hodgman®, Johnson™, JRC®, Mitchell®, Penn®, Pflueger®, Sebile®, Shakespeare®, SpiderWire®, Stren®, and Ugly Stik®”. On April 21, 2020 a trade publication reported that Moody’s had downgraded the company’s credit rating to Caa2. Some of the company’s metrics mentioned were truly worrying, including the projection that leverage might be headed north of 13.0x in fiscal 2020 and that the business is generating negative free cash flow. The main source of liquidity is drawing on a $125mn Revolver, but that can only go so far before something bad happens.

The BDC Credit Reporter had already added the company to its Underperformer list from the IIIQ 2019 with a Corporate Credit Rating of 3. This last downgrade, and the obvious impact on a business like this from Covid-19, are sufficient factors to downgrade the company further to CCR 4. At the same time, we’re adding Pure Fishing to the Weakest Links list, as a bankruptcy or restructuring look more likely than not in the short term. It’s not like market conditions will be materially improving any time soon…

For the two FS Investment KKR BDCs with second lien debt due in 2026 this could presage a painful credit reversal. At year end 2019 total exposure at cost was in our Major category (i.e. over $100mn), with FS KKR Capital (FSK) with $80.3mn at cost and FS Investment II with $45.5mn. At year end 2019 the discount at FMV from cost was only modest: (12%). We can’t say for sure, but we’d expect the current discount to be two to three times higher. In fact, in a worst case, we could readily see the junior debt fully wiped out in a bankruptcy or restructuring. Also gone would be about $7.0mn of investment income.

Given the size of the BDC exposure, we’ll be paying more than usual attention to what happens to Pure Fishing. Some idea may come from FSK’s May 2020 results and Conference Call. In any case, whatever valuation ascribed by the BDC – who can be unduly optimistic – this is a credit problem that could take some time to play out.