New York, July 18, 2022 — Moody’s Investors Service (“Moody’s”) today affirmed all ratings of Herbalife Nutrition Ltd. (“Herbalife”), including the company’s Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating. Moody’s also affirmed all of HLF Financing SaRL, LLC’s ratings. The outlook is stable for both issuers. The company’s SGL-2 speculative grade liquidity rating is unchanged.
Moody’s affirmed Herbalife’s ratings because the company continues to generate solid free cash flow, maintain good liquidity, and leverage is projected to remain within Moody’s expectations for the rating over the next year despite a recent increase. Moody’s also anticipates Herbalife will continue to take steps to mitigate cost pressures and navigate challenges maintaining the representative base amid a tight labor market and a recovery in away-from-home employment opportunities as pandemic related restrictions ease. Herbalife will also manage share repurchases to maintain the company’s 3.0x gross debt-to-adjusted EBITDA target (based on the company’s calculation; 3.1x as of March 2022).
The following ratings/assessments are affected by today’s action:
Ratings Affirmed:
..Issuer: Herbalife Nutrition Ltd.
…. Corporate Family Rating, Affirmed Ba3
…. Probability of Default Rating, Affirmed Ba3-PD
….Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD4)
..Issuer: HLF Financing SaRL, LLC
….Senior Secured Bank Credit Facility, Affirmed Ba1 (LGD2)
….Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD4)
Outlook Actions:
..Issuer: Herbalife Nutrition Ltd.
….Outlook, Remains Stable
..Issuer: HLF Financing SaRL, LLC
….Outlook, Remains Stable
RATINGS RATIONALE
Herbalife’s Ba3 CFR focuses on its niche product and service offering and its aggressive financial strategy due to a history of debt financed share buybacks. The company has been in existence for more than 40 years and offers a combination of meal replacement products and customer support, which offers clients an avenue to weight loss and improved nutrition. That said, its global multi-level marketing structure has been under scrutiny for years by several regulatory agencies. The company’s business model is highly reliant upon its ability to recruit and retain sales representatives around the world, which will be tested as work-from-home options continue to proliferate due to pandemic-driven workplace flexibility. There is long term risk inherent to multi-level marketers (“MLM”) in developing markets as increasing retail penetration, e-commerce activity, and competition can gradually diminish legacy distribution advantages. Developing markets also tend to include more volatile economies and foreign exchange exposure. As a result, Herbalife must maintain stronger credit metrics than comparably rated companies that have more stable and less-risky business profiles. Historically, there is a consistent pattern of meaningful debt financed share buybacks as it manages its leverage within its target level (3.0x gross debt-to-adjusted EBITDA, based on the company’s calculation) and Moodys expectations for the rating. Herbalife’s credit profile is supported by its predictable profitability and free cash flow and excellent geographic diversity. Finally, nutrition and wellness is a sector that will continue to see strong long-term demand driven by the aging population, obesity trends, and consumers’ continued focus on wellness even as the impact of the coronavirus recedes.
Herbalife’s SGL-2 speculative grade liquidity rating reflects the company’s good liquidity, supported by a sizable $570 million cash balance as of March 2022, Moody’s projection for more than $300 million of free cash flow over the next 12 months, and no maturities in 2022 and 2023 aside from modest and manageable term loan amortization. Liquidity is also supported by unused capacity on the $330 million revolver ($150 milion drawn as of March 2022). The cushion within the 3.75x maximum debt-to-EBITDA leverage covenant is good as of March 2022 but could tighten if earnings weaken without a corresponding reduction in debt over the next year.
ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS
Herbalife’s overall CIS-4 score recognizes the risks involved in Herbalife’s multi-level marketing model, with a high-level of regulatory scrutiny and necessity of managing both customer and sales representative turnover.
Herbalife’s E-3 environmental issuer profile score, representing moderately negative risk, considers waste and pollution as the overriding factor. That said, Moody’s acknowledges Herbalife’s focus on reducing its environmental footprint as it continues to identify carbon emission and resource conservation projects. For example, Herbalife has utilized technology in its manufacturing operations that allows for significantly faster production than the industry standard, using less electricity and resources. In packaging, Herbalife focuses on reductions in single-use plastics and plastic bags.
Herbalife’s S-4 social issuer profile score, which reflects highly negative risk, is driven by the impact of its multi-level marketing structure, which has been under scrutiny for years by a number of regulatory agencies. The company’s business model is also highly reliant upon its ability to recruit and retain sales representatives around the world, which is reflected in Moody’s view of its human capital risk. Customer relations are also important with headline risk acute as any adverse publicity could negatively impact brand image and consumer demand. The nutrition and wellness sector will continue to see strong demand over the longer term driven by the aging population, obesity trends and the focus that consumers now have on wellness, which was accentuated by the coronavirus pandemic.
Herbalife’s G-3 governance issuer profile score, representing moderately negative risk, recognizes Moody’s view that its financial strategy is aggressive, particularly when viewed through the lens of share repurchases, which have been substantial over the past five years. Share repurchases are discretionary, and the company is also focused on managing buybacks while maintaining its 3.0x gross debt-to-adjusted EBITDA leverage target. Because free cash flow has been insufficient to fully fund share repurchases over the last five years, some level of debt financing was necessary.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody’s view that Herbalife will grow revenue and earnings over the next year, continue to generate solid free cash flow of at least $300 million annually, and maintain debt-to-EBITDA in a mid 3x range . Moody’s also assumes in the stable outlook that there will be no disruptions to the business model or adverse regulatory actions.
Ratings could be upgraded if Moody’s is able to become more comfortable with the industry’s regulatory environment and the company’s business model, and if the company maintains a more conservative financial strategy which would indicate a commitment to a higher rating.
Ratings could be downgraded if operating performance deterioration or a more aggressive financial strategy results in debt/EBITDA sustained above 4x or retained cash flow (RCF)/net debt falling below the mid-20% range. An adverse shift in the industry’s regulatory environment or deterioration in liquidity could also lead to a downgrade.
The principal methodology used in these ratings was Consumer Packaged Goods published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389866. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Based in Los Angeles, CA, Herbalife LTD. is a direct seller of weight management products, nutritional supplements, and related services, as well as personal care products intended to support a healthy lifestyle. The company operates through individual distributors that consists of approximately 6.3 million global members across 95 countries. Revenues for the publicly-traded company were $5.6 billion for the 12 months ended March 2022.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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Charles O’Shea
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service, Inc.
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John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
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