The credit rating of trading card giant Topps Co. has been pushed deeper into junk bond territory as last week’s loss of Major League Baseball’s license for cards continues to have ramifications.
Credit ratings agency Moody’s Investor Service downgraded Topps one notch to B2, about midway on its scale of non-investment grade debt. The company also has a negative outlook from Moody’s as “the prospective loss of the company’s flagship baseball license agreements will significantly and negatively affect revenue and earnings,” the agency wrote in a note. Moody’s also cited the canceled merger with Mudrick II SPAC with its planned debt refinancing as adding to Topps’ risk.
It’s another blow for Topps, since lower credit ratings mean increased expenses for future financing. In the space of a week Topps has gone from announcing surging second quarter earnings and coasting to closing a merger with Mudrick II to having its flagship MLB baseball-card product swiped away, its going-public plan scuttled and its financial rating dinged.
Topps didn’t reply to requests for comment.
Last week, Sportico reported Fanatics signed MLB and the players association to long-term deals, ending an association between Topps and top-level baseball that began in 1951. Topps part-owner Michael Eisner was set to lock in a $600 million payday in cash and stock on the deal while Chicago private equity firm Madison Dearborn was cashing out with $521 million. A spokesperson for Topps was unavailable to comment on today’s rating. Mudrick and Topps canceled the merger after news of the MLB-Fanatics deal, and on Friday Topps issued a statement saying MLB and the players union never indicated they were negotiating with anybody else and didn’t give Topps a chance to offer counterproposals.
Topps has $197 million in debt due to be paid off in October 2022 as well as $30 million in revolving credit line due in April next year, according to Moody’s. The October debt had been planned to be refinanced after going public. Shareholders had been expected to approve the transaction in a vote scheduled for yesterday. Topps’ licensing deal with the MLBPA ends in 2022, while its deal with MLB ends in 2025. Topps should be able to produce its normal run of baseball player cards through the MLB deal.
“The prospective loss of the baseball licensing contracts represents a significant weakening of the company’s market position amid increased competition in a shifting trading card business,” Moody’s stated. “Moody’s believes the abrupt contract losses will weaken the Topps brand and create challenges to overcoming the lost revenue and restoring the market position.”
At the moment, Topps sales are booming. Early last week the business disclosed that second quarter sales surged 78% and that it should generate as much as $850 million in sales for 2021. Moody’s said the strong results mitigate the risk to Topps somewhat, as well as $190 million of cash on hand. The ratings agency noted, however, that a portion of the cash on hand is tied to Topps’ swiftly growing gift cards line, so “the company would need to significantly increase cash on hand over the next 12 months to repay the term loan with internal resources.”
Moody’s had upgraded Topps two levels in June, from B3 to B1, based on the Mudrick II merger. Moody’s rates corporate debt on a scale of 21 levels, starting at Aaa, the most secure, and ending at C, the riskiest. Ratings of Ba1 and lower are commonly called “junk” by investors due to their perceived riskiness.
