Investing.com -- Moody’s Ratings has revised the outlook for TGP Holdings III LLC, also known as Traeger, from positive to negative, while simultaneously affirming the company’s ratings. These include the Caa1 Corporate Family Rating (CFR), Caa1-PD Probability of Default Rating (PDR), and the Caa1 rating on Traeger’s senior secured first lien bank credit facilities. The facilities comprise a $125 million first lien revolver due in 2026, and an original principal amount of $535 million for the first lien term loan due in 2028. Traeger’s speculative grade liquidity (SGL) rating remains at SGL-3.

The negative outlook is a result of weakening discretionary consumer spending and uncertainty regarding a potential significant decline in profitability and cash flow generation due to weak macro-economic conditions and significant exposure to tariffs.

Reduced consumer discretionary spending, influenced by high inflation and a weaker economic outlook, is expected to affect demand for Traeger’s products, especially its premium-priced outdoor grills. The company, which sources about 80% of its outdoor grills from China and 20% from Vietnam, is significantly exposed to US tariffs. Despite Traeger’s efforts to mitigate increased tariff costs through actions like optimizing supply chain, cost management, and price increases, there is a risk that these measures may not fully counterbalance the additional costs.

Traeger’s business also faces risks due to high earnings seasonality centered around the spring and summer grill selling season. Increased recessionary risks and tariffs could potentially lead to a meaningful deterioration in consumer demand during the selling season, exacerbating the potential decline in profitability. The company also faces refinancing risk related to the upcoming expiration of its $125 million revolving credit facility due in June 2026, owing to a more risk averse credit market and the company’s weak credit metrics with elevated debt/EBITDA leverage at 7.1x as of year-end 2024.

The ratings affirmation is based on the expectation that Traeger will maintain adequate liquidity supported by its access to a committed accounts receivables (AR) factoring facility of up to $75 million expiring in August 2027, providing some financial flexibility to fund business and working capital seasonality over the next 12 months.

Traeger’s Caa1 CFR reflects its modest relative scale with annual revenue of around $604 million and narrow product focus with limited geographic diversification. The company’s financial leverage is high with debt/EBITDA at around 7.1x as of fiscal year ending 31 December 2024.

The rating also takes into account Traeger’s solid market position within the niche wood pellet grill industry, its strong brand image, and its good track record of product innovation. The company benefits from the recurring nature of its sizable consumables segment that is more resilient to cyclical downturns, and its growing installed base.

Ratings might be upgraded if the company shows an improving track record of financial operating results and generates positive free cash flows with good levels of reinvestments on an annual basis, while maintaining debt/EBITDA below 6.5x. A ratings upgrade would also require the company to maintain at least adequate liquidity, including extending the expiration of its revolver past 2026.

On the other hand, ratings could be downgraded if the company’s revenue and EBITDA deteriorate due to factors such as weaker consumer discretionary spending, lower volumes, tariff costs, or supply chain disruptions. The ratings could also be downgraded if liquidity deteriorates for any reason including negative free cash flow on an annual basis, the company does not proactively address the approaching expiration of its revolver due June 2026, or there is limited availability on the revolver facility.

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