Moody’s Ratings has downgraded the Corporate Family Rating (CFR) of Fender Musical Instruments Corporation (FMIC) from B2 to B3, signaling an increased risk of default. In addition, the agency lowered Fender’s Probability of Default Rating to B3-PD from B2-PD, and reduced its senior secured term loan rating to Caa1 from B3. Previously, Fender had a stable outlook, but Moody’s has now revised this to negative.
The downgrade reflects Moody’s expectation of high financial leverage and declining liquidity for Fender in 2025, driven by a challenging business environment. The company’s earnings are predicted to drop due to factors such as labor inflation, heightened promotional activities, pricing pressures, a stronger US dollar, and tariffs. As a result, Fender’s debt-to-EBITDA leverage is expected to exceed 7.5x in 2025, up from 5.4x at the end of September 2024.
To address rising costs, Fender is taking measures like adjusting prices, securing vendor concessions, and rebalancing its sourcing strategies. However, ongoing tariffs could still prove to be highly disruptive and costly. Fender’s liquidity, bolstered by a $183.8 million asset-based lending (ABL) revolving credit facility and $26 million in cash, is deemed adequate. However, the company’s liquidity position is constrained by a projected negative free cash flow of $15 to $20 million for 2025.
Despite these challenges, Fender maintains a strong market position with its renowned brand and long history of producing high-quality acoustic and electric guitars. The company also benefits from good geographic diversity. However, these advantages are tempered by its narrow product focus and earnings volatility, largely driven by the discretionary nature of demand for musical instruments. This volatility is further intensified by the difficult economic landscape and exposure to US tariffs.
Fender’s debt-to-EBITDA leverage is expected to rise beyond 7.5x in 2025 due to earnings pressures from lower unit sales and escalating costs, including tariffs. The company also faces a projected negative free cash flow in the range of $15 to $20 million for 2025.
The negative outlook reflects uncertainty stemming from tariff policies and the company’s ability to manage their impact and the selective consumer spending on discretionary items. Fender’s ratings could be upgraded if the company successfully mitigates the effects of tariffs and generates organic revenue growth, along with consistent positive free cash flow. Conversely, the ratings may be downgraded if earnings fall further or if Fender fails to sufficiently manage the tariff impacts, or if unit volumes decline.
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