Moody’s Investors Service has announced that it has placed Tapestry Inc.'s Baa2 rating under review for a potential downgrade. This decision comes after the company's recent announcement of its acquisition of Capri, the parent company of Michael Kors, for approximately $8.5 billion, a transaction that will primarily be financed through debt.
Moody's stated that this review is driven by various governance considerations, including the significant increase in debt resulting from the Capri acquisition and Tapestry's new leverage target. This increase will cause a sustained rise in the company's net debt/EBITDA ratio, exceeding its typical level of below 1x.
The funding for this deal will mainly come from bonds, term loans, and the use of balance sheet cash. To ensure the retention of its investment-grade rating, Tapestry has secured $8 billion in committed bridge financing and plans to suspend share buybacks.
Moody's Vice President-Senior analyst Raya Sokolyanska noted that the acquisition of Capri by Tapestry will enhance the company's scale and customer reach, as it adds three valuable brands to its luxury portfolio. Furthermore, Tapestry aims to leverage its direct-to-consumer focus and technology platform to drive profitability growth at Michael Kors, Versace, and Jimmy Choo.
However, this acquisition will temporarily result in higher leverage than the company's previous target of under 2.5x. It is important to highlight that in response to this development, Tapestry's stock has experienced a decline of 15%.
The outcome of Moody's review will be closely monitored by investors and industry observers, as it will have significant implications for Tapestry Inc.'s credit rating and future financial performance.
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