Wahoo's credit rating downgraded again after defaulting on payment

If you are keeping score, mark down a point for yet another cycling company facing stiff headwinds post-pandemic, because according to SGB Media, Wahoo Fitness missed required debt service payments as of the 2nd of April. The news is only the latest bad news for Wahoo.

Going into the spring of 2022, American credit rating and risk analysis company Moody's Investors Service predicted that Wahoo would have a "negative free cash flow of around $30-$35 million" over the subsequent 12 months. This prediction was based on falling consumer demand as 2021 came to a close.

At the end of January 2023, that prediction had run its course with Wahoo fully exhausting its $30m recurring line of credit, or 'revolver'. Reports at the time suggested the company had $5.9 million cash on hand and looming payments against a $225 million principal loan as well as the $30 million revolver.

At the beginning of this month, April 2023, missed debt service payments became official. As a result, S&P Global Ratings — a separate American credit rating agency — responded by penalizing the company with a downgraded credit rating, dropping to 'D' from a previous 'CCC-', albeit with a recovery rating of 2, indicating "expectation for substantial (70 per cent to 90 per cent; rounded estimate 70 per cent) recovery."

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."

Moody's however did not immediately issue guidance. The delay reflected an acknowledgement that Wahoo had "entered into a forbearance agreement [a plan made between a lender and a borrower who is struggling to make payments] with its first lien [highest priority] lenders on its interest and principal payments" allowing for a five-business day grace period on the payment. As the grace period has now also passed, we are seeing Moody's follow the previous S&P downgrade and offer its own investor guidance.

Not all of the news for Wahoo is negative, though. There is a thread throughout all of the financial analysis that recognizes the position that Wahoo has within the sports world. Back in early 2022, Moody's stated that "Wahoo has a good record of successful new product launches and it expects significant sales and earnings contribution from several new products and refreshes in late 2022.” At the time, it was noted that market headwinds included "ongoing inflationary pressures" that would "erode consumer spending power." As well as shifting patterns of "spending back to categories that were limited over the past few years."

With the added benefit of hindsight, the most recent Moody's analysis goes further. The rating agency is again complimentary, stating that “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."

There seems to also be a recognition that the future looks somewhat positive and Wahoo 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."

What does the future hold for Wahoo?

Unfortunately, despite the positives, both S&P and Moody's seem to agree that the way forward will require some type of restructure. Moody's leaves the prediction slightly more open by saying there is a "high likelihood of a material debt restructuring as the company continues to discuss strategic alternatives with its lenders to pursue a sustainable capital structure." S&P meanwhile offers a more concrete expectation that any restructure would result in an investor loss, but also a "substantial" recovery as denoted in its recovery rating score of 2.

This analysis is further supported by a statement direct from Wahoo. When asked for comment, a Wahoo Fitness spokesperson said: “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. 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.”

Outside of the financial realities, there are also continued market and competition headwinds. In the 2022 analysis, S&P noted that Wahoo would face "higher commodity prices and freight costs." S&P then went on to explain that Wahoo was looking to offset those challenges through an evaluation of "price changes to offset higher costs."

As we now know though, price increases were not going to be a viable response. In September of last year, Zwift significantly undercut the price of one of Wahoo's best-selling products, the Kickr Core smart trainer, with the release of the Zwift Hub smart trainer. In response, Moody's noted "increased competition in smart trainers including alternatives offered at much lower price points" as part of the 2023 analysis.

That leaves the current Zwift vs Wahoo lawsuit as a significant outstanding question. The court date for a final decision in that dispute was set for April 11. As yet, no court filings have been published, but we're expecting to hear more on the subject very soon.