Investing.com -- Fitch Ratings has downgraded Polaris (NYSE: PII ) Inc.’s Long-Term Issuer Default Rating and senior unsecured notes rating to ’BBB-’ from ’BBB’, with a Negative outlook.
The downgrade reflects expectations that credit metrics will fall short of ’BBB’ rating requirements through 2026 due to a weak macro environment and U.S. import tariffs. The ratings apply to $500 million of senior unsecured notes.
Despite signs of stabilization in the powersports market, Fitch anticipates it will take several years before demand shows steady improvement. The Negative outlook indicates potential further erosion in credit metrics if the downturn persists longer than expected.
Polaris faces significant challenges as the powersports industry experiences sharp demand decline. High inflation and interest rates have weakened consumer confidence, causing potential buyers to delay purchases of discretionary vehicles. Fitch does not expect meaningful demand growth until 2027 or 2028.
The company reduced wholesale shipments by 21% in 2024 compared to an 8% retail volume decline to address dealer inventory levels. This reduction affected all three segments: off-road, on-road, and marine.
In June, Polaris amended its credit facility, renewing its $400 million 364-day term loan and extending maturity to June 2026. The amendment raised the net leverage covenant to 4.0x in Q2 2025 and to 5.5x from Q4 2025 through Q2 2026, indicating the company expects leverage to exceed Fitch’s negative sensitivity for several quarters.
Tariff exposure remains a concern for Polaris. While its Mexico-assembled off-road vehicles comply with USMCA trade agreements, the company faces exposure from Chinese components for U.S. factories. The total impact of all tariffs is likely to reach $100-150 million in 2025.
Fitch expects Polaris’ EBITDA gross leverage to rise toward the mid-4x range by year-end 2025, declining to mid-2x range by year-end 2027. The company’s post-dividend free cash flow margins are projected to run in the 1.0%-2.5% range over the next several years.
Polaris is expected to prioritize debt reduction over the intermediate term as it works to bring net EBITDA leverage down to the 1.0x to 2.0x range.
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