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Mattel Bonds Tumble on Guaranteed Debt Roll-Out, Ratings Downgrades

Bonds backing fallen angel Mattel fell today after the toy maker rolled out weakened sales guidance for the remainder of 2017, alongside plans to issue $1 billion of unsecured notes, with priority claims that effectively prime its existing unsecured bonds. The new senior notes will be marketed alongside roughly $1.6 billion in new asset-backed lending (ABL) revolving credit, under ratings that were cut again today deeper into junk territory by all three ratings agencies.

Sources noted existing bondholders would end up with the “short end of the stick” in light of the proposed debt launches. Mattel’s corporate and unsecured bond ratings were cut on Monday by S&P Global Ratings to BB–, from BB, with a negative outlook remaining in place and a 3 recovery rating assigned to the proposed new unsecured notes. However, S&P revised the recovery rating for the existing unsecured stack to 4, as existing noteholders are impaired by the ABL revolver in the capital structure and subsidiary guarantees in the new proposed notes, “which result in higher priority claims ahead of the existing notes.”

This marks S&P’s third cut to the issuer’s credit rating since July, when ratings were first cut by one notch from BBB on flagging operational metrics, and then again in October by two notches following the bankruptcy of key retailer Toys R Us in September.

Mattel 3.15% notes due 2023 and 6.2% notes due 2040 bore the brunt of the damage, sliding roughly four points and 5.5 points, respectively, to 90.5 and 93.5, according to MarketAxess. The 2040 bonds traded near 110% of par ahead of the S&P fallen-angel downgrade in October. Meanwhile, the issuer’s 2.35% notes due 2019 were off by about a point, falling to 97.8.

Moody’s today downgraded Mattel’s unsecured bonds to Ba3, from Baa3, and assigned a Ba2 corporate rating on the issuer. Fitch Ratings, meanwhile, downgraded Mattel’s issuer default rating to BB, from BBB–, and its existing senior unsecured notes to BB–, from BBB–. Fitch also assigned a BB rating to Mattel’s proposed $1 billion of senior notes.

Mattel now expects its full-year 2017 gross sales will decline in percentage by at least the mid-to-high single digits compared to 2016, in contrast with June guidance of “mid-to-high single digit revenue growth, and operating profits at, or above, 15%.”

The company today pointed to “key retail partners moving toward tighter inventory management” and challenges facing Toy Box and other underperforming brands.

“The unfavorable year-over-year gross margin experienced during the first nine months of 2017 is expected to continue throughout the fourth quarter of 2017, as a result of unfavorable product mix, higher freight and logistics expense, and lower fixed cost absorption,” the company noted in a Monday filing. “In addition, continued negative trends in top line performance for the balance of the year could result in additional gross margin deterioration as a result of higher inventory write-downs and discounts offered to clear inventory.”

The company added that it expects to achieve in 2018 a third of its projected $650 million in cost savings through 2019, while incurring about $200 million of related severance and restructuring costs between the current quarter and end of 2019.

The company’s CEO, Mary Margaret Hastings Georgiadis, on Oct. 26 emphasized that the company “will clearly not achieve the top line expectation we discussed in June,” based on lackluster quarterly earnings, in which adjusted EBITDA of roughly $227 million fell 31% shy of analyst forecasts, based on S&P Global consensus data, prompting downgrades by both S&P and Moody’s.

Mattel (NASDAQ: MAT) is an El Segundo, Calif.–based toy manufacturer. — James Passeri

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