Moody's lowers Varsity Brands

Moody's Investors Service downgraded the ratings on Varsity Brands Holding Co., Inc., including its corporate family rating to B3 from B2 and probability of default rating to B3-PD from B2-PD.

The downgrades are largely the result of the company's planned upsizing of its existing debt outstanding, Moody's said, and the associated increase in financial risk in connection with a pending leveraged buyout by Bain Capital.

As a result of this rating action, the company's $1.4 billion principal first-lien term loan due 2024 was downgraded one notch to B2 from B1.

The outlook remains stable.

Bain Capital is in the process of acquiring a majority stake in Varsity Brands in a sponsor-to-sponsor transaction from Charlesbank Capital Partners, which is expected to maintain a minority stake in the company, Moody's explained.

The proceeds from the planned $275 million incremental first-lien term loan and $120 million incremental second-lien term loan, together with $1.620 billion of rolled debt from the company's existing portable capital structure, $879 million of sponsor equity and roughly $5 million of balance sheet cash, will be used to fund the acquisition of the company, the agency said.

The downgrade largely stems from its meaningfully elevated financial risk profile, with leverage measured by its adjusted debt-to-EBITDA rising from about 6.5x to about 7.8x pro forma for the planned buyout, and notwithstanding potential synergies, Moody's said.

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