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Investing.com -- On May 14, 2025, Moody’s Ratings announced a downgrade of Vestis Corporation’s corporate family rating (CFR) to B2 from Ba3. The downgrade also affected Vestis’ probability of default rating (PDR), which has been reduced to B2-PD from Ba3-PD. Furthermore, the company’s senior secured bank credit facilities saw a downgrade to B2 from Ba3. The outlook for the company, however, has been revised from negative to stable. Vestis is a North American company that provides uniform rental and workplace supplies.
The downgrade in ratings is primarily due to lowered revenue and earnings expectations for Vestis in 2025 and 2026. The company has been struggling with net customer losses and pricing pressure, largely due to service quality issues and competition, since it became independent in 2023. The uncertainty around Vestis’ long-term revenue growth and profitability continues to grow until the company addresses these competitive issues.
Vestis’ current financial net leverage target is under 3x, which is higher than the previous range of 1.5x – 2.5x. The company has also shifted its focus to providing quarterly earnings guidance rather than annual guidance. Moody’s expects that Vestis’ revenue will decrease by around 2% in the next 12 months and that its debt/EBITDA will remain high at around 6x through the fiscal year ending in September 2026.
The company’s profitability is expected to decline in fiscal 2025 due to negative operating leverage, as the falling revenues are likely to compress the EBITA margin to around 5% from the previous expectation of 8%. The stable outlook reflects Moody’s belief that the decline in revenue should slow over the next 12 months due to new accounts and that the company’s good liquidity provides some flexibility to implement strategies to improve earnings.
Environmental, Social, and Governance (ESG) considerations, specifically governance related to management credibility and track record, as well as financial strategy and risk management, were key factors in the rating actions. This is due to the company’s inconsistency in meeting financial guidance targets, recent high turnover in senior management, including the CEO and CFO, and the change in its net financial leverage target and earnings guidance.
Vestis’ B2 CFR reflects the company’s high financial leverage with debt/EBITDA of 6x for the 12 months ended March 28, 2025. This is expected to remain around 6x during the next 12 months. The company’s EBITDA is declining significantly due to service quality issues and net customer losses.
In terms of liquidity, Vestis is in a good position, with cash of $28.8 million as of March 28, 2025. The company is expected to generate an annual free cash flow of around $65 million over the next 12 months, which includes the suspension of the $18 million annual cash dividend. Vestis has $264.3 million of availability on a $300 million revolving credit facility that expires in 2028.
The company’s ratings could be upgraded if it shows sustained revenue and earnings growth, with debt to EBITDA sustained below 5.0x, the EBITA margin sustained around 6%, and free cash flow to debt exceeding 5%. However, the ratings could be downgraded if the company’s revenue and profitability continue to decline, debt to EBITDA is sustained above 6.5x, liquidity deteriorates or the company adopts more aggressive financial policies.
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