S&P downgrades Freedom Group on expected drop in gun sales

Declining firearm-background checks spurred S&P Global Ratings to downgrade Freedom Group, the firearms maker owned by Cerberus Capital Management.

S&P lowered the corporate-credit rating for Freedom Group to CCC+ from B-, according to a March 30 note from analyst Jing Li. It also cut its rating on Freedom’s $575 million in loans due 2019 to CCC+ from B-. The outlook is negative.

Companies with a CCC rating, a speculative grade, are considered to be currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments, the S&P website said.

NCIS firearm background checks are considered an indicator of firearm sales over time, S&P said. Those checks dropped significantly, in the mid-to-high-teens percentage range, for the three months ended Feb. 28, the credit-rating firm said. In its most recent annual report, Freedom Group said NCIS checks were down 18 percent for the first two months of 2017. This caused S&P to predict that firearm sales will likely drop through the end of 2017.

“Given the outcome of the November 2016 election, we believe consumer fears of increased firearm regulation have decreased meaningfully and will likely result in significantly slower firearm and ammunition sales this year,” S&P said.

S&P estimates that Freedom’s revenue could fall 10 percent to 20 percent in 2017, even if the drop in firearm and ammunition sales moderates later this year. This could cause Freedom’s EBITDA to decline 30 percent to 50 percent in 2017, which may cause the adjusted debt-to-EBITDA multiple to spike above 10x, S&P said.

Freedom’s revenue and cash flow may not recover enough in 2018 to support refinancing the company’s $575 million in a senior secured term loan and ABL facility, both due in 2019.

For full-year 2016, Freedom Group’s net sales rose nearly 7 percent to $865.1 million from $808.9 million in 2015. Operating income was $81.5 million in 2016, compared with a loss of $13.9 million the year before. Long-term debt was $817.2 million.

“In this scenario, the risk of a debt restructuring of some form over the next two years is increased, and if it were to occur, could lead to lower ratings,” S&P said.

Freedom Group, Mission, North Carolina, is one of the most famous PE investments. Founded in 1816, Freedom Group designs, makes and markets firearms, ammunition and related products for hunting, shooting sports, law enforcement and military. Brands include Remington, Bushmaster and DPMS.

Cerberus began building Freedom Group when it acquired Bushmaster in 2006. The firm used Cerberus Institutional Partners Series IV LP, which closed on $6.5 billion in 2006, to invest in the company.

Public outcry over Sandy Hook caused Cerberus to put Freedom Group up for sale in 2012. (Freedom makes the Bushmaster AR-15 rifle used in the Sandy Hook shooting attack.)

Cerberus claimed it was unable to find a buyer for Freedom and continued to hold the investment. In May 2015, the PE firm offered to let its LPs sell their stakes in the company, which was now called Remington Outdoor, Buyouts reported.

Investors including CalSTRS and TIAA-CREF ended up selling their stakes in Remington/Freedom. Cerberus pulled Remington out of its PE funds and placed the investment in a separate special-purpose investment vehicle, Buyouts reported. Remington is owned by Cerberus and those investors that chose to stay with Remington, Buyouts said.

The 2016 annual report shows that Cerberus and CEO Stephen Feinberg control 92.3 percent of Remington/Freedom.

Cerberus declined comment. Executives for Remington/Freedom could not be reached for comment.

Action Item: Contact Cerberus CEO Stephen Feinberg +1 212-891-2100

Freedom Group’s Bushmaster AR-15 rifle. Photo courtesy Luevanos/iStock/Getty Images