Moody's downgraded Weight Watchers (WTW) debt:
Moody's expects a sharp drop in 2014 revenue and EBITDA to about $1.4 billion and $325 million, respectively, even with management plans to initiate cost reduction programs. As a result, debt to EBITDA (after Moody's standard adjustments) may increase to above 7 times, which is high for the B1 CFR. Moody's anticipates Weight Watchers will remain profitable but down considerably from earlier expectations and generate at least $100 million of free cash flow. Lowered free cash flow and in Moody's view financial covenant constraints will limit Weight Watchers access to about $50 million of its revolver, so the Speculative Grade Liquidity rating was revised to SGL-3. Liquidity is considered adequate.
The negative ratings outlook reflects Moody's concern that evidence of business stabilization may not appear in 2014, which could imply further deterioration of financial leverage and cash flow.
The "Debt" section of our notes always assumed Weight Watchers would only have access to $50 million of revolving credit. Interest costs increase 0.25% ($6 million a year) when rated below Ba3 by Moody's (B1 is lower) and Standard & Poor's. See the debt section of our notes for details.
Separately, Morningstar downgraded the "moat rating" for Weight Watchers from "wide" to "narrow". You can find our discussion of free apps (the reason for Morningstar's downgrade) near the end of the notes PDF.
I promised I would tell you if Quan or I changed our position in Weight Watchers. Today, Quan added to his position.
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