Moody’s downgrades True Religion

Moody's Investors Service said it downgraded True Religion Apparel, Inc.'s corporate family rating to Caa1 from B3, probability of default rating to Caa1-PD from B3-PD, first-lien term loan to Caa1 from B3 and second-lien term loan to Caa3 from Caa2.

The outlook is stable.

Moody’s said the downgrade reflects its view that True Religion's capital structure is unsustainable, with management-adjusted debt/EBITDA at high-8 times as of the second quarter of 2015, and that given continuing brand challenges the company has uncertain prospects for meaningful earnings improvement that would reduce leverage.

The company's revenue declined 10% and EBITDA declined over 42% in the first half of 2015 over the prior year despite signs of stabilization in the denim category, driven primarily by clearance activity for non-denim and everyday jeans offerings, a mix shift to “athleisure” products, which carry lower gross profit than denim, and supply disruption.

While the company's new management team is implementing strategies to increase the brand's relevance to a broader audience and refocus on the premium denim segment, Moody's said it believes that executing a successful operational turnaround in the near term, particularly for a premium brand, would be difficult under the constraints of high leverage and diminished free cash generation.

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