Moody’s Downgrades True Religion’s Debt

The company's corporate family credit rating moved a single tick, to “B3” from “B2.”

Citing concerns about the “mature premium denim category,” Moody’s Investors Service lowered the corporate family credit rating of True Religion Apparel Inc. a single tick, to “B3” from “B2.”

“B” ratings sit below those in the “Ba” family, the highest speculative, or noninvestment, grade. Approximately $485 million of rated bank debt is covered by the evaluation.

True Religion, previously publicly held, was acquired by Towerbrook Capital Partners LP for $835 million in July. Moody’s estimated sales for the year ended Feb. 1 at $490 million. In its final full year as a public company, sales were reported to be $467.3 million.

Moody’s said the revised rating reflects True Religion’s “high debt leverage in the high six-times range, limited scale and narrow product focus in the premium denim category.” It described premium denim as “mature” and vulnerable to “potential challenges from other rival categories, such as activewear, which has recently gained popularity.”

The rating outlook remained “stable” as Moody’s expects the company to “maintain a good liquidity profile, while modestly growing its earnings.”

Ratings could be downgraded if free cash flow generation “turns negative or earnings declines persist.” The ratings agency said the company “meaningfully underperformed” its expectations in the year ended Feb. 1 “due to heavy merchandise discounting in the back half of 2013 partly as a result of weather and mall traffic weakness.”

In a report by analyst Raya Sokolyanska, Moody’s placed the focus on the strategic plan being put together by chief executive officer David Conn and the team he’s assembled since his arrival at the time of the acquisition. It said the rating could be elevated if the firm “achieves meaningful earnings growth by successfully executing its strategic initiatives while maintaining good liquidity.”

A signal that it had achieved those objectives would be a ratio of debt to earnings before interest, taxes, depreciation and amortization of below 6 and a ratio of earnings before interest, taxes and amortization to interest expense of above 1.75.