S&P Raises Kate Spade & Co. (KATE) to 'B+'; Cites Improved Growth Outlook

Standard & Poor's Ratings Services raised its corporate credit rating on New York-based Kate Spade & Co. (NYSE: KATE) to 'B+' from 'B' on an improved financial risk profile assessment. The outlook remains stable.

At the same time, we raised our issue-level rating on the company's $400 million senior secured term loan due 2021 to 'B+' from 'B', commensurate with the raised corporate credit rating. The recovery rating on this debt remains '3', indicating our expectation for meaningful (50% to 70%) recovery for the term loan lenders in the event of a payment default.

"The rating action on Kate Spade reflects our forecast for higher sales growth and a somewhat improved margin outlook versus our previous forecasts. We believe the strength exhibited in the Kate Spade brand will follow through into 2015, where we project sales growth of about 10%," said credit analyst Helena Song. "At the same time, we forecast an improvement in operating metrics based on the company's restructuring efforts and business model realignment. We see these improvements leading to debt leverage in the low- to mid-4x range in 2015 and an overall improvement in funds from operations (FFO) to debt in the high-teens range."

Our rating outlook is stable. We believe operating performance for Kate Spade will remain relatively stable following the divestiture of underperforming brands and business model realignment. We also believe credit metrics will remain in line with our indicative ratios for an "aggressive" financial risk profile for the next year.

Downside scenario

We could lower the rating if we believe the company will sustain total debt-to-EBITDA leverage above 5x in conjunction with FFO to debt below 12%. This could occur as a result of a weaker-than-anticipated operating performance or a misstep resulting from the company's aggressive expansion plans. We estimate EBITDA would need to decline about 25% from estimated 2015 levels for this to occur, assuming debt levels remain stable.

Upside scenario

Though unlikely in the next year, we could raise the rating if we believe the company can sustain a ratio of FFO-to-debt that approaches 25%, in line with our indicative ratios for a "significant" financial risk profile. Adjusted EBITDA would need to increase nearly 30% from our estimated 2015 levels for this to occur, assuming debt levels remain stable. Additionally, we could consider a higher rating if the company diversifies its brand portfolio in conjunction with a reduction in the volatility of profitability.

You May Also Be Interested In

• Boeing (BA) Cut To Baa3 From Baa2 By Moody's, Outlook Negative
• Why these analysts say this strategy "may help in choppier times"
• Fiserv (FI) PT Raised to $186 at Baird