Moody’s Investors Service has downgraded The Sports Authority Inc.’s corporate family rating and the $300 million secured term loan due 2017.

The downgrade came as retail and real estate sources were speculating about the possibility of a bankruptcy for the Englewood, Colo.-based company, and whether or not the company can avoid a Chapter 11 filing. A company spokeswoman declined to comment on the speculation.

The ratings agency downgraded the rating to “Caa3” from “Caa1.” It based the downgrade on the company’s announcement that it elected to not make a $21 million subordinated notes interest payment that was due Jan. 15. Moody’s said the ratings outlook is “negative.” It had been at “stable” before the downgrade.

Moody’s said according to the “terms of the note agreement, Sports Authority has a 30-day grace period to make the missed interest payment before it triggers an event of default. If the notes payment is not made within the 30-day cure period, Moody’s will likely consider the event a limited default.”

A spokeswoman for the sports retailer said, “We have been working with Rothschild, our outside financial adviser, for the past several months to evaluate our capital structure, and we have been engaged in discussions with our various senior lender groups to explore options for strengthening our balance sheet.”

She added that even though the company has “sufficient liquidity to conduct its business operations and to make the current interest payment on the subordinated mezzanine debt, after consultation with our senior lenders we elected not to make the interest payment while we continue these discussions.”

Moody’s in its downgrade report said that despite the discussions with lenders on addressing the debt maturities beginning in May 2017 and on improving its capital structure, it believes that the structure is “unsustainable at current weak levels of operating performance.” It noted that the company’s leverage is very high and that its operating performance has been “inconsistent over the past several years due to weak execution, adverse weather, high promotional activity and competitive pressure, and a challenged consumer.” The agency also noted that “[earnings before interest, taxes, depreciation and amortization] margins have been pressured by expense deleveraging, lower merchandise margins and higher shipping costs related to growing e-commerce sales.”

The Sports Authority sells some apparel, but mostly sporting equipment, in 470 stores across 41 states and Puerto Rico. Moody’s said revenues exceeded $2.6 billion for the rolling 12 months ended Oct. 31.

The company was acquired in 2006 for $1.3 billion, or $37.25 a share, by an investor group led by Green Equity Investors, which is affiliated with private equity firm Leonard Green & Partners. The transaction included assumed debt, and the investor group include members of the retailer’s senior management team.

Based in Englewood, Colo., the company in its heyday once had nearly 5,000 stores. These days it faces formidable competition from online players such as and from brick-and-mortar operations such as Dick’s Sporting Goods.





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