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Investing.com -- WW International (NASDAQ:WW) Inc. has been downgraded from ’ CCC (WA:CCCP)’ to ’CCC-’ at S&P GLobal due to an increased risk of default. The outlook remains negative, with debt ratings also lowered. The company revealed that it borrowed $121.3 million from its $175 million revolving credit facility on January 31, 2025, pushing the total borrowings to the maximum limit. This action indicates a state of financial distress, raising the likelihood of default within the next six months.
The company’s financial distress could lead to a bankruptcy or out-of-court restructuring. It is also expected that WW will default on its 5.25x maximum net leverage covenant for the test period ending March 29, 2025, as the current covenant leverage exceeds 10x. This situation could trigger a payment default.
The issuer credit rating on WW was lowered due to these financial concerns, along with the issue level rating on the company’s senior secured debt. The recovery rating remains at ’4’, which suggests an average recovery of 30%-50% in the event of a default, with a rounded estimate of 30%.
The negative outlook on the company is due to its vulnerability to a near-term payment default, covenant breach, or distressed exchange over the coming six months. This downgrade action was taken by S&P Global Ratings on February 6, 2025.
Despite having approximately $57 million cash on hand as of September 28, 2024, WW fully drew down its $175 million revolving credit facility by January 31, 2025. The company stated that the borrowings were to provide financial flexibility, not to address immediate liquidity needs. However, this action, coupled with several senior management departures, including the former CEO and CFO, signals a potential restructuring event.
WW is expected to default on its maximum net leverage covenant for the reporting period ending March 29, 2025. The company could face continued operating challenges in 2025 with negative free operating cash flow. If the anticipated financial covenant default under the revolver cannot be remedied, borrowings could accelerate, potentially followed by accelerations of its term loan borrowings and notes.
The company continues to face operational challenges due to the declining and highly competitive weight loss industry. Core digital and workshop subscribers and revenues are expected to decline in 2025, with clinical subscribers remaining a small fraction of its overall subscriber base and revenue. The company’s brand appears to be falling out of favor, especially among younger consumers, as they seek newer brands and weight loss alternatives.
S&P Global Ratings could further downgrade WW if the company misses a principal or interest payment or announces any type of debt restructuring transaction viewed as distressed and tantamount to a default. Although highly unlikely, the rating could be raised if the risk of default over the next six months is no longer apparent.
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