Wolverine Worldwide’s share buyback policy and the impact of Covid-19 have lifted its debt leverage, prompting Standard & Poor’s (S&P) to downgrade its credit rating. A further downgrade is possible if the company fails to reduce its leverage in 2021, said S&P. A few days later, on May 6, the company announced that it is offering $300 million worth of senior notes due in 2025 to repay borrowings under its revolving credit facilities.

S&P cut the issuer’q credit rating and the rating on unsecured notes to ‘BB’ from ‘BB+’, with a negative outlook, opening the way for a further downgrade if debt remains high.

Although the company had a successful 2019 holiday season and performed well the first two months of 2020, its aggressive debt-funded share repurchases in 2019 has left it with little room to weather the Covid-19 pandemic to maintain a ‘BB+’ rating level, the agency said. Wolverine ended 2019 with adjusted leverage around 3.5 times, and S&P forecast that leverage will peak above 4 times in 2020 and will be sustained in the 3 times area in 2021. 

While the digital channel now represents about 30 percent of the group’s revenues it will not offset lost sales in brick-and-mortar stores closed during the pandemic, S&P estimates. It expects the second half of the year to be weak, even as stores reopen, because wholesale customers are reducing orders for fall 2020.The rating agency forecast that orders placed by Wolverine’s wholesale clients could drop by as much as 50 percent in 2020. Further disruption could come from key clients not surviving the recession, resulting in weaker cash generation, leading to adjusted leverage above 4 times in 2021 and a possible further cut of the credit rating.

On the other hand, Moody’s reaffirmed its corporate rating, indicating that the company has good liquidity and credit availability, and that its financial leverage could improve from 5 times at the end of this year to 3.6 times in 2021.

In the meantime, Wolverine has declared a quarterly cash dividend of 10 cents per share, the same as in the previous quarter, reflecting an annual dividend of 40 cents a share.