S&P Rates Global Motorsport
3 August 1998
Global Motorsport Assigned Ratings by S&P
NEW YORK, July 31 -- Standard & Poor's today assigned its
single-'B'-minus rating to GMG Operating Corp.'s privately placed, Rule 144A
$80 million senior notes due 2008. A triple-'C'-plus rating was assigned to
holding company Global Motorsport Group Inc.'s $25 million senior discount
notes due 2009. Also, Standard & Poor's assigned its single-'B' rating to GMG
Operating's $55 million bank credit facility. A single-'B' corporate credit
rating was assigned to Global Motorsport Group and GMG Operating.
The outlook is stable.
The ratings reflect Global Motorsport's position as the largest
independent distributor of aftermarket parts and accessories for Harley-
Davidson motorcycles, as well as the company's improving operating
performance. These favorable characteristics are offset by thin pro forma
interest coverages resulting from the impending leveraged buyout of the
company by Fremont Partners L.P.
The company distributes an extensive range of aftermarket parts and
accessories largely used for motorcycle customization and performance
enhancement. The 1997 $38.5 million acquisition of former competitor Chrome
Specialties Inc. provided a good strategic fit and broadened the product line
across a wider range of price points. Sales have increased in each of the
past 15 years, reflecting the growing popularity of Harley-Davidson
motorcycles. Harley-Davidson Inc.'s ongoing growth in unit production, large
installed base, and the desire of enthusiasts to customize their motorcycle
should help fuel continued growth in sales.
Global Motorsport Group is significantly smaller than Harley-Davidson,
which only sells its parts and accessories through its network of exclusive
franchised dealers, thus creating a market niche for the company to exploit.
Products are sold to a diverse group of customers, but the company does
compete with Harley-Davidson in sales of parts and accessories to Harley-
Davidson franchised dealers. The company is attempting to improve geographic
diversity and increase international volume, but international sales currently
account for only 17% of the total.
Fixed costs are relatively low, as the company purchases the majority of
its products from a diverse group of third-party manufacturers in Asia.
However, the dependence on Asian manufacturing relationships could affect
profitability should sourcing difficulties arise. Operating cash flow has
grown only modestly over the past year, primarily due to delays in the receipt
of products imported from Taiwan.
The product life cycle is relatively long, and exposure to obsolescence
risk is relatively low. About 58% of the company's sales are marketed under
the company's brand names. However, about 42% of sales are lower-margin
products under the brand names of other manufacturers that the company
purchases in order to offer a full product line.
Financial risk is relatively high, with pro forma operating cash flow
coverage of total interest expense thin at 1.4 times (x) for the 12 months
ended April 30, 1998. Pro forma cash interest coverage of 1.9x provides some
near-term flexibility, as mandatory cash interest payments are not required
on the senior discount notes until 2004.
The bank loan rating is single-'B', at the same level as the corporate
credit rating. The credit agreement is secured by a first-priority security
interest in all of the tangible and intangible assets of the company. Under
Standard & Poor's simulated default scenario, the collateral should provide
some measure of protection to lenders, and lenders can expect to recover more
than a typical unsecured creditor. However, it is not clear that a distressed
enterprise value would be sufficient to totally cover a fully drawn loan
facility, as the value of inventory, receivables, trademarks, and intangibles
are likely to be severely compromised in a bankruptcy scenario.
OUTLOOK: STABLE
Although the near-term operating outlook is favorable, the company will
need to significantly improve operating performance in the intermediate term
to alleviate its debt burden and offset the accretion of the senior discount
notes. -- CreditWire