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New York, December 06, 2022 — Moody’s Investors Service (“Moody’s”) assigned a B2 rating to Hayward Industries, Inc.’s (Hayward) proposed $125 million incremental first lien term loan due 2028. All other ratings for the company remain unchanged including Hayward’s B1 Corporate Family Rating (CFR). The outlook is unchanged at stable.
Hayward plans to use the proceeds from the proposed $125 million incremental first lien term loan to repay borrowings outstanding on its $425 million asset based lending (ABL) revolving facility due 2026 (unrated), pay related fees and expenses, and increase cash on balance sheet. The revolver had $100 million of borrowings as of 1 October 2022. Borrowings on the revolver facility were used primarily to help fund about $83 million of acquisitions over the past 12 months.
The B1 CFR and stable outlook are not affected because the proposed refinancing transaction improves the company’s liquidity by increasing revolver availability, and is slightly leveraging with Hayward’s debt/EBITDA (all ratios Moody’s adjusted otherwise stated) at 2.9x as of the last twelve months (LTM) period ending 2 July 2022. The acquisitions were nevertheless leveraging and terming out the revolver indicates the company expects to operate with a higher debt level.
Hayward recently lowered its fiscal 2022 outlook and now expects a weaker fourth quarter of 2022 driven by higher than expected cost inflation, channel inventory reduction, challenging macro-economic conditions in Europe, and foreign currency exchange headwinds. The company now expects its fiscal 2022 sales to decline approximately -6% and company-adjusted EBITDA of $365 to $370 million. Hayward had previously revised its outlook for fiscal 2022 sales to decline -2% to -6% and company-adjusted EBITDA of $385 to $400 million, from its initial expectations for fiscal 2022 sales to grow 6% to 9% and company-adjusted EBITDA of $460 to $475 million.
Persistently high inflation and weakening economic conditions is pressuring discretionary consumer spending. Moody’s expects these pressures to persist into 2023 and for consumer demand for discretionary products such as swimming pools and related equipment to decline following very high demand levels over the past two years that was in part driven by consumers spending more on their home during the coronavirus pandemic. As a result, Moody’s projects Hayward’s revenue to decline mid-to-high teens percentage range and debt/EBITDA leverage to increase to the mid 3x over the next 12-18 months. However, Moody’s also expects Hayward will generate good positive free cash flow to debt in the mid-to-high teens percentage range. The expected higher leverage reduces the company’s cushion within the credit metrics Moody’s expects for its B1 CFR to absorb prolonged demand or cost pressures. Hayward’s expected good free cash flow generation provides financial flexibility to reduce debt if earnings deteriorate more than expected.
Assignments:
..Issuer: Hayward Industries, Inc.
….Senior Secured First Lien Term Loan B, Assigned B2 (LGD4)
RATINGS RATIONALE
Hayward’s B1 CFR broadly reflects its strong market position and good brand awareness in the North American pool equipment industry, and its growing presence internationally. Hayward has a relatively stable revenue base from its repair and replacement business, which represents about 80% of revenue, and its good EBITDA margin is supported by its pricing stability. The company’s good liquidity reflects our expectation for good free cash flow of at least $200 million over the next 12 months benefitting from a lower working capital position, and access to an undrawn $425 million revolver due 2026, pro forma for the proposed transaction. Hayward’s publicly stated financial policy that targets a debt-to-EBITDA leverage ratio (as per management’s calculation) of 2.0x – 3.0x, which was at 2.4x at the end of third quarter 2022, should support a moderate financial leverage position, and helps mitigate high governance risks related to high ownership concentration by private equity sponsors. The company’s good free cash flow generation provides the financial flexibility to reduce debt if earnings decline more than anticipated.
Hayward’s credit profile also reflects its narrow product focus as a manufacturer of pool equipment, and the inherent exposure to cyclical downturns given the discretionary nature of residential pool products. In addition, the company is exposed to cyclicality related to new pool construction, mitigated partially by its large aftermarket sales. Persistently high inflation and weakening economic conditions is pressuring consumer spending on discretionary goods. Moody’s expects that demand for the company’s products will moderate following the very high levels over the past two years. As a result, Moody’s projects Hayward’s revenue to decline mid-to-high teens percentage from the last 12 months level and debt/EBITDA leverage to increase to the mid 3x range over the next 12-18 months. Hayward has high customer concentration with its top customer, Pool Corporation, accounting for 36% of net sales in fiscal 2021, and its cash flows are highly seasonal.
Hayward’s ESG credit impact score is highly negative (CIS-4) mainly driven by the highly negative exposure to governance risks, primarily related to its high ownership concentration by its financial sponsors and limited track record of operating and maintaining financial leverage within its stated target of 2.0x 3.0x (company’s calculation). The company is moderately negatively exposed to environmental and social risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook reflects that the company’s moderate leverage and good free cash flow generation provides cushion to absorb a future demand pullback following the very high demand levels over the past two years. The stable outlook also reflects Moody’s expectation that the company will maintain a moderate financial policy and that there will be no significantly leveraging acquisitions or shareholder distributions over the next year.
Ratings could be upgraded if the company continues to increase its revenue scale while maintaining a stable EBITDA margin, maintains debt/EBITDA below 3.0x and sustains free cash flow/debt above 10%. A ratings upgrade would also require the company to maintain at least good liquidity, and for Moody’s to expect moderate financial policies that support credit metrics at the above levels.
Ratings could be downgraded if revenue or the EBITDA margin deteriorates more than Moody’s expectations, or if debt/EBITDA is sustained above 4.0x. Ratings could also be downgraded if liquidity deteriorates such as from modest free cash flow generation on an annual basis, or increased reliance on the revolver facility.
Hayward Industries, Inc. is a manufacturer of swimming pool equipment including pumps, heaters, sanitizers, filters, cleaners, liners and more. Hayward also manufactures equipment that controls the flow of fluids for various industrial end markets. The company’s largest market is the U.S. (over two thirds of sales). Hayward reported revenue for the last twelve months period ending 1 October 2022 of $1,408 million. Following the March 2021 initial public offering, the company sponsors CCMP Capital Advisors, L.P., MSD Partners, L.P., and Alberta Investment Management Corporation own around 67% of Hayward’s shares. Hayward Holdings, Inc. is the indirect parent company of Hayward Industries, Inc., and its shares are listed on the New York Stock Exchange under the ticker symbol “HAYW”.
The principal methodology used in this rating was Consumer Durables published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74987. 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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
This rating is 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.
Oliver Alcantara
Asst Vice President – Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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