Paris, March 13, 2023 — Moody’s Investors Service (Moody’s) has today changed the outlook to positive from stable on the ratings of BK LC Lux Finco 1 S.a.r.l. (Birkenstock or the company), a holding company of German footwear brand Birkenstock. Concurrently, Moody’s has affirmed the company’s B2 corporate family rating (CFR), the B2-PD probability of default rating (PDR), the Caa1 rating of the €430 million backed senior unsecured notes, and the B1 instrument ratings on the €375 million senior secured term loan B (TLB) issued by Birkenstock Group B.V. & Co. KG and $850 million senior secured TLB issued by Birkenstock US BidCo, Inc.. The outlook on all entities has changed to positive from stable.

“Our decision to change Birkenstock’s outlook to positive reflects the company’s strong positioning in the rating category and its exceptional operating performance in the last two years, well above initial expectations, and despite high inflation and a weaker macroeconomic backdrop” says Guillaume Leglise, a Moody’s Vice President-Senior Analyst and lead analyst for Birkenstock. “The positive outlook assumes that the company will continue to focus on business growth, invest to expand production capacities, maintain good liquidity and a balanced financial policy in the next 18 months” adds Mr Leglise.

A full list of all affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Today’s rating action is driven by Birkenstock’s exceptionally strong performance in 2022 and its solid credit metrics for the rating category. At end-December 2022, Moody’s estimates the company’s leverage (Moody’s-adjusted gross debt/EBITDA) reduced to around 4.3x, compared to 8.2x at the time of the 2021 rating inception. This fast deleveraging reflects the company’s strong operating performance, with sales and EBITDA growing by double-digit figures, by +28% and +31% respectively during fiscal 2022 (year ended 30 September 2022). Moody’s expects that Birkenstock’s key credit metrics will continue to strengthen over the next 18 months, driven by (i) solid customer demand for the company’s footwear products across all geographies and channels on the back of the casualisation tailwinds, (ii) continued strength in wholesale demand, (iii) the expansion into adjacent segments such as closed toe shoes, and (iv) the company’s new production facilities expected to be delivered in late 2023, which will enable significant volume growth, especially in underpenetrated countries. Moody’s expects the company’s leverage to approach 4.0x in the next 12 months, which would support an upgrade to B1.

The B2 CFR reflects Birkenstock’s (i) strong brand positioning, with limited fashion risk as evidenced by the longevity of the product success and high customer loyalty thanks to the unique value proposition of its core product focused on high quality and orthopedic benefits; (ii) its selective distribution strategy and growing direct-to-consumer (DTC) operations, notably online presence, which enable better control of brand image and optimize product allocation; (iii) its full in-house manufacturing, which mitigates supply chain issues and significantly reduces the reputational risks stemming from potential deviations in standards and practices of external producers; and (iv) its good free cash flow (FCF) generation and strong liquidity despite large capital spending to support business expansion and increasing cost of financial debt.

In contrast, the CFR is constrained by (i) the company’s exposure to high inflation and weak macroeconomic prospects, which can constrain sales and earnings growth in the next 12 to 18 months; (ii) its narrow brand focus and concentrated product line, albeit offered in a large range of styles; (iii) its exposure to intense competition in the casual footwear retail sector, which may be subject to changing customer preferences; and (iv) the limited financial disclosure in the company’s audited accounts, which has improved in fiscal 2022, but remains well below that for peers.

Moody’s believes that there is still a degree of uncertainty regarding the financial policy of the company’s sponsor-owner, L. Catterton. Moody’s acknowledges that L. Catterton has not extracted any cash from the company since the 2021 leveraged buyout and despite Birkenstock’s strong financial performance to date. Instead, the sponsor-owner has supported the company’s business growth with large capital spendings (nearly €100 million invested in 2022/23) for expanding production facilities. The positive outlook assumes that the company will continue to invest in the development of production capacities and DTC operations, while maintaining good liquidity and a balanced financial policy.

LIQUIDITY PROFILE

Birkenstock’s liquidity is strong, supported by €165 million of cash on balance sheet and full availability under the €200 million Asset Backed Lending (ABL) facility as at end-December 2022. The ABL facility can be used to cover seasonal variations in working capital, but this facility has never been used since inception, owing to the company’s good FCF generation. Moody’s expects the company’s FCF to range between €70 million and €100 million in fiscal 2023, despite working capital outflows to support  growth-driven inventory build-up, substantial capex investments of around €120 million and higher financial charges on the company’s floating rates senior secured TLBs issued by Birkenstock Group B.V. & Co. KG and Birkenstock US BidCo, Inc.. Moody’s expects the company’s FCF to trend towards €200 million from 2024, supported by earnings growth and lower capex investments.

The company faced large working capital outflows in 2022 and in recent quarters, owing to a substantial increase in inventories. While the company typically build up inventories in October to March ahead of the peak summer season, Birkenstock also strives to voluntarily increase inventories currently to mitigate transportation issues and support growth in the DTC channel, on the back of strong customer demand.

The company doesn’t have any short-term maturities with the first large amount of debt not due before 2028, when the senior secured TLBs will mature. The ABL facility is due in April 2026, but has never been used to date. Moody’s expects this ABL facility to remain largely undrawn thanks to the company’s good FCF generation.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook reflects Moody’s expectations that Birkenstock will continue to record sales and earnings growth in the next 12-18 months. Quantitatively, Moody’s outlook assumes at least mid-single digit sales growth, broadly stable EBITDA margins despite inflationary pressure, which will support further deleveraging towards 4.0x in the next 12-18 months. The positive outlook also incorporates Moody’s assumption that the company will continue to invest in the expansion of its production facilities, successfully executes and completes this project by end 2023 as planned, while maintaining good FCF and a balanced financial policy.

STRUCTURAL CONSIDERATIONS

The CFR is assigned at the level of BK LC Lux Finco 1 S.a.r.l., the top entity of the senior unsecured notes restricted group. Birkenstock Group B.V. & Co. KG is the reporting entity of the group and borrower of the €375 million senior secured TLB.

Birkenstock’s debt capital structure comprises a €200 million ABL facility, a €375 million senior secured TLB issued by Birkenstock Group B.V. & Co. KG and a $850 million senior secured TLB issued by Birkenstock US BidCo, Inc., ranking ahead of the company’s €430 million backed senior unsecured notes (€429 million outstanding as of 31 December 2022). The senior secured TLBs and the ABL facility benefit from the same maintenance guarantor package, including upstream guarantees from guarantor subsidiaries, representing around 90% of the company’s consolidated EBITDA. Both instruments benefit from security assignments over intercompany receivables, material bank accounts, inventories, raw materials, insurance claims and trade receivables. The B1 ratings of the senior secured TLBs reflect their senior security package, ranking behind the ABL facility, which benefits from priority in case of collateral enforcement. The Caa1 rating of the backed senior unsecured notes due 2029 is two notches below the CFR, reflecting their subordination in the debt structure.

Birkenstock’s B2-PD probability of default rating is in line with the CFR and reflects the use of a 50% family recovery rate, consistent with a capital structure that includes bonds and bank debt.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A further positive pressure on the rating could build up if the company executes well on its growth strategy while maintaining a high EBITDA margin and lower leveraged profile on a sustainable basis. Quantitatively, upward pressure could materialise if the company’s Moody’s adjusted gross debt/EBITDA ratio stays below 4.5x on a sustainable basis, and EBITA/interest expense ratio remains sustainably above 2.5x and Moody’s-adjusted FCF/gross debt remains above 10%. An upgrade would also require Birkenstock to maintain good liquidity and demonstrate a balanced and predictable financial policy.

Conversely, negative pressure on the rating could materialize if the company’s sales growth and margins come under pressure indicating that its core product is losing its appeal. Quantitatively, downward pressure could occur if the company’s Moody’s adjusted gross debt/EBITDA ratio rises above 5.5x and EBITA/interest expense ratio fall sustainably below 1.5x. Although unlikely based on the historic cash generative nature of the business, negative pressure could also arise from the significant deterioration in FCF or adequate liquidity is not maintained at all times.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: BK LC Lux Finco 1 S.a.r.l.

…. Probability of Default Rating, Affirmed B2-PD

…. LT Corporate Family Rating, Affirmed B2

….BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Caa1

..Issuer: Birkenstock Group B.V. & Co. KG

….Senior Secured Bank Credit Facility, Affirmed B1

..Issuer: Birkenstock US BidCo, Inc.

….Senior Secured Bank Credit Facility, Affirmed B1

Outlook Actions:

..Issuer: BK LC Lux Finco 1 S.a.r.l.

….Outlook, Changed To Positive From Stable

..Issuer: Birkenstock Group B.V. & Co. KG

….Outlook, Changed To Positive From Stable

..Issuer: Birkenstock US BidCo, Inc.

….Outlook, Changed To Positive From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Apparel published in June 2021 and available at https://ratings.moodys.com/api/rmc-documents/72775. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Linz am Rhein, Birkenstock is a German brand that primarily designs, manufactures and sells casual footwear. The company’s product portfolio includes sandals, closed-toe shoes and other accessories. Dating back to 1774, the company mainly distributes its products through the wholesale channel and to a lesser extent via direct retail stores. Since 2016, the company has rapidly developed its online division and is now digitally present in 33 countries. Birkenstock operates a retail network of around 50 stores. In the 12 months to 31 December 2022, the company reported €1.3 billion in sales and €400 million in EBITDA (as adjusted by the company).

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Guillaume Leglise
Vice President – Senior Analyst
Corporate Finance Group
Moody’s France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s France SAS
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454