Now the reason has become clear. Fitch Ratings has downgraded Accell Group and questions the company's ability to meet its financial commitments. According to Accell Group, “the Fitch report reflects the challenging market circumstances.”
Source: Bike europe
Fitch Ratings has downgraded Accell Group's long-term issuer default rating, as well as its senior secured debt rating to CCC. The CCC rating definition states that Accell Group is “vulnerable to non-payment and is dependent on favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation.”
Excess inventories and weaker demand
The downgrade published by Fitch Ratings is already the third this year for Accell Group. “The downgrade reflects our expectation that Accell Group's EBITDA margin, or operating profit as a percentage of revenue, will decline to single digits in 2023-2024. Excess inventory on the market and weaker consumer demand, which together with high competition will lead to a deeper discount environment for a longer period than previously assumed. This translates into high working capital needs at the end of 2023, leading to liquidity margin erosion and negative free cash flow,” Fitch wrote in a note.
“We believe the current capital structure is unsustainable due to a material decline in earnings, with only a gradual recovery assumed from 2025. Accell Group has a corrective action plan, but is subject to significant execution risks, which generate substantial uncertainty regarding the short-term restoration of its credit profile". As part of the remediation plan, Accell Group closed the Ghost factory in Germany, cut jobs in Raleigh UK and reorganized Babboe.
In this new situation for Accell Group it becomes questionable whether KKR and Teslin will maintain the non-financial agreements signed by the new owners. This specifies among other things that there will not be any split of the group or its business units or any sale of a substantial part of the group.
Liquidity support from KKR
“The Fitch report reflects the difficult market circumstances in the cycling sector, which also impact the Accell Group,” Accell Group spokespeople told Bike Europe today. “While the short-term bicycle market has remained volatile in recent months, medium-term bicycle market fundamentals are expected to remain strong, with significant growth opportunities for operators of scale, such as Accell Group, and a continued acceleration towards high-end e-commerce. Bikes."
According to Accell Group, “KKR has consistently supported the company's liquidity needs in this challenging environment with a long-term conviction on the industry and business prospects. Most recently, they provided incremental financing of €150 million on top of the €100 million made available in mid-2023. The commitment of €250 million this year is a clear signal of the confidence they have in the company and this provides Accell Group with sufficient liquidity to overcome these short-term challenges. Other stakeholders have also provided great support, providing a €75 million ABL (Asset Based Lending) line and a credit securitization of up to €100 million.”
“We are focused on ensuring the company is in the best possible position to succeed as the market recovers and are taking actions to strengthen the company to weather the current circumstances and position it for a successful and sustainable future. The recently announced restructurings in the UK, Germany and the integration of Velosophy in the Netherlands have been implemented to reduce the costs of our business and remain competitive in the long term.”
The discount continues into 2024
The much-discussed inventory levels in the industry have led to aggressive discounting campaigns. Fitch expects this to continue into 2024 due to weak consumer demand and persistently high inventories. “The latter will likely force most manufacturers, including Accell, to discount aggressively in 2024 and we assume only a moderate normalization of market conditions starting in 2025.”
Gradual improvements are expected
“Market circumstances will gradually improve and we have a long-term debt maturity profile. The cash injection significantly strengthens the company and increases our confidence that we will emerge from this on stronger footing. The long-term outlook for the company is favorable,” writes Accell Group.
“The company is competitively positioned in the green mobility sector, with a portfolio of iconic brands and an experienced leadership team. We see clear growth opportunities arising from trends such as electrification, cycling infrastructure, healthier living and tax incentives and government subsidies, which are expected to stimulate demand in the years to come.”
