OREANDA-NEWS. S&P Global Ratings today affirmed its 'BB-' corporate credit rating on Westport, Conn.-based Compass Group Diversified Holdings LLC (CODI). The outlook remains stable.

We also affirmed our 'BB-' issue-level rating on CODI's upsized senior secured $550 million revolving credit facility maturing in 2019 and upsized $568.5 million senior secured term loan (which is the outstanding amount and includes a $250 million add-on) due 2021. The recovery rating on the senior secured facilities is '3', indicating our expectation for meaningful (50%-70%, at the low end of the range) recovery in the event of a payment default. We expect the company to use proceeds from the term loan add-on, combined with borrowings under the revolver, to fund the acquisition of 5.11 Tactical. Pro forma for the transaction, we believe outstanding debt will be about $750 million.

"Our ratings reflect our expectation that CODI's leverage, as measured through LTV, will remain below our previously set threshold of 45%, a level we deem commensurate with the ratings. While the transaction results in a meaningful increase in LTV (to around 40% from about 25% at June 30, 2016), we believe management will focus on repaying holding company debt in the near term," said credit analyst Brennan Clark. "The company has a demonstrated track record of paying down its acquisition financing with cash from operations and divestitures, as well as listed shares of its stake in Fox Factory Holdings (Fox)."

The stable outlook reflects our expectation that CODI will maintain LTV below 45% over the next 12 months. After a significant increase in debt to finance the 5.11 acquisition, we believe the company will focus on deleveraging before making any further meaningful acquisitions. Despite continued weak portfolio characteristics, we expect CODI will continue to receive sufficient interest income from its investee companies to cover its own obligations.

We could lower the rating if the company breaches its LTV threshold of 45% for an extended period, without taking action to remediate the higher levels of leverage. This could be the result of permanent erosion in portfolio value and/or an increase in debt to finance additional acquisitions. We could also lower the ratings if portfolio diversity materially weakens or its portfolio companies unexpectedly come into distress, which could require CODI to either contribute new equity or experience losses on its equity investments.

While unlikely over the next 12 months, we could raise the rating if CODI meaningfully improves its portfolio characteristics, in particular asset liquidity through increased ownership of publicly held investments (either through initial public offerings of existing investments or through new investments) and we believe it will sustain a loan to value below 30%.