Bike computer and tech company Wahoo Fitness has had its credit rating lowered by rating agency Moody's after it delayed debt service payments at the beginning of this month.
It is just the latest bit of bad news for the American business, maker of the Elemnt computers and Kickr smart trainers, after repeated warnings of a liquidity shortfall at the company, reported by business site SGB Media.
Earlier this year, fellow credit ratings agency S&P downgraded Wahoo’s debt from CCC to CCC-, which was then taken down to D this month.
According to the S&P website, a credit rating of D is defined as: "Payment default on a financial commitment or breach of an imputed promise; also used when a bankruptcy petition has been filed."
The ratings are important as these are what investors looks at when deciding whether to invest into debt, and whether they are allowed to by their mandate. Funds will only put money into companies that have certain debt ratings.
These warning lights are the "first stage in a company restructuring", according to Rupert Hargreaves of Moneyweek who spoke to Cycling Weekly. Despite Wahoo's inability to pay its debt making it insolvent, "it's very unlikely the business will completely disappear".
The Moody's analysis reads: "Wahoo’s Ca CFR [Corporate Family Rating] reflects that the company missed the 31 March 2023 interest and principal payment past the five business days grace period. The ratings also reflect the high likelihood of a material debt restructuring as the company continues to discuss strategic alternatives with its lenders to pursue a sustainable capital structure, as well as Moody’s view of recovery."
In a statement released on Wednesday, the American company said that it was "actively collaborating and moving forward positively with the support of our lenders and our private equity partner Rhone - to create a new capital structure that meets the long term needs of the business".
“Wahoo has made a special agreement to delay our scheduled interest and principal payment with our lenders for our long term note and revolving credit facility," a spokesperson said. "The credit agencies define a default - as any missed interest or principal payment, regardless of any prearranged agreement.
"We are actively collaborating and moving forward positively with the support of our lenders and our private equity partner Rhone - to create a new capital structure that meets the long term needs of the business.
"In the meantime, Wahoo remains committed to providing the best products and experiences for our customers and remaining true to our mission of building a better athlete in all of us.”
It is not all bad news, with Moody's writing: “Wahoo benefits from its strong market position in the cycling and smart fitness products market, supported by its good brand recognition, product innovation, and high product quality.
"The company has meaningfully grown its revenue scale over the past five years, supported by successful new product introductions and tailwinds from positive consumer health and fitness trends. Wahoo benefits from its good geographic, channel, and customer diversification.
"The company’s asset-light business model and meaningful direct-to-consumer business allow for strong overhead leveraging and very low capital expenditures."
"It means it needs to take some significant action, either some massive cost cutting, or declaring bankruptcy," Hargreaves told Cycling Weekly. "Bankruptcy [in the US] gives you protection from creditors, such as the banks and investors who've lent it money. Without the protection, they could force Wahoo to start selling off its assets. Bankruptcy would give the business a bit of breathing space to figure out a deal that works for all stakeholders."
It is important to note that Wahoo says it is working on creating a "new capital structure that meets the long term needs of the business".
