DBRS Downgrades and Places Golf Town Canada Inc. & Golfsmith International Holdings, Inc. Under Review with Negative Implications

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Golf Town Canada Inc. & Golfsmith International Holdings, Inc. (Golfsmith or the Company) to CCC (high) from B as well as its Senior Secured Second Lien Notes rating to CCC (low) from CCC (high). The recovery rating on the Senior Secured Second Lien Notes remains at RR6. DBRS has subsequently placed the ratings Under Review with Negative Implications.

The Company has engaged Jeffries LLC and Alvarez & Marsal to explore strategic alternatives, including the possible sale of the Company or its assets, which is indicative of the Ontario Municipal Employees Retirement System’s (OMERS) interest in exiting the business. The downgrade and the Under Review with Negative Implications status reflect the heightened probability of a transaction in which bondholders will not receive a return of their full principal. In addition, the rating actions reflect the uncertainty surrounding the proceeds from and the timing and structure of any transaction (sale, restructuring or bankruptcy filing).

DBRS believes that Golfsmith should have sufficient liquidity for at least the short term to meet its obligations through the end of any sale and/or restructuring process based at least in part on the anticipated support of OMERS, if necessary.

On February 1, 2016, DBRS confirmed the Issuer Rating of the Company at B and the Senior Secured Second Lien Notes rating at CCC (high). The trends remained Negative, reflecting near-term liquidity concerns and weakness in Golfsmith’s operating performance as well as uncertainty about its ability to return earnings and credit metrics that are considered to be acceptable for the ratings. In addition, DBRS recognized the historical support provided by OMERS, evidenced by its pledge of collateral to ensure sufficient liquidity for the Company during seasonal periods in 2015.

In its review, DBRS will focus on the type of transaction undertaken and the prospects for repayment of the Senior Secured Second Lien Noteholders. DBRS will also continue to monitor Golfsmith’s results, beginning with the Q2 2016 results scheduled to be released in the coming weeks, and will proceed with its review as more information becomes available. DBRS will aim to resolve the under review as soon as possible.

Golfsmith’s previous ratings reflected the golf business’ exposure to economic cycles, intense competition in golf retail (including from online competitors), declining interest in the game of golf and risks associated with the execution of Golfsmith’s strategy. The Company’s ratings were supported by its well-established market positions, its formats and private-label brands as well as its geographic diversification.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Merchandising Industry and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.