S&P cuts Loyalty Ventures

S&P said it downgraded its ratings for Loyalty Ventures Inc. and the company’s term loan to CCC+ from B-. The 3 recovery rating on the term loan is unchanged and indicates meaningful (50%-70%; rounded estimate: 60%) recovery in default.

“We believe LVI's capital structure is unsustainable and dependent on favorable business and economic conditions to meet financial commitments. LVI is facing challenges in both its AIR MILES® Reward Program division and Brand Loyalty business segment. The AIR MILES division is in transition because its competitive environment is intensifying with coalition partners (Sobeys Inc., The Jean Coutu Group Inc.) joining other loyalty programs,” S&P said in a press release.

Additionally, “A combination of ongoing weakness in EBITDA, higher inventory (for Brand Loyalty) than optimal levels, and ongoing working capital investments have led to greater-than-expected cash flow usage. Therefore, LVI's free cash flow deficits widened for last 12 months to Sept. 30, 2022. We anticipate cash usage will continue in fourth-quarter 2022, albeit at a slower pace, as we expect some working capital unwinds primarily in the month of December,” the agency said.

S&P forecasts LVI will finish 2022 with free cash flow deficits of about $40 million-$45 million, which is a meaningful revision from about low-single-digit amounts in its previous estimate. The debt-to-EBITDA ratio is projected to be 7x-7.5x range in 2023.

The outlook is negative.

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