With $1.08 billion in total debt, but total cash of $1.01 billion -- and net profits of $395 million last year, according to data from S&P Global Market Intelligence, you might think that jeans maker Levi Strauss & Co. (NYSE:LEVI) was a company in the pink of financial health.
Not so fast, says credit analyst Fitch Ratings.
This morning, the credit rater downgraded Levi Strauss debt one notch from BB+ to BB. The rater also assigned a negative outlook to Levi's debt.
As the analyst explains, its move reflects "the significant business interruption from the coronavirus pandemic and the implications of a downturn in global discretionary spending that Fitch expects could extend well into 2021."
Although Levi's balance sheet looks pretty good right now, Fitch anticipates Levi will have to take on so much debt to get through this crisis that its adjusted leverage will more than double from 3.1 times in fiscal 2019 to around 7 times in fiscal 2020. Sales are expected to decline 25% this year to $4.4 billion, and earnings before interest, taxes, depreciation, and amortization (EBITDA) could shrink 77% to just $175 million.
"Leverage is unlikely to return to fiscal 2019 levels in fiscal 2022 even assuming a sustained topline recovery," warns Fitch, and "a more protracted or severe downturn could lead to further actions."
In standard ratings language, more letters are better (i.e. BB is better than B), and letters coming earlier in the alphabet are better than letters later (i.e. B is better than C).
A BB rating, which Fitch currently assigns to Levi Strauss debt, is considered not investment grade (i.e., it's a junk bond). Indeed, BB qualifies as highly speculative.