Zuffa's Credit Rating Outlook Cut

September 18, 2007

Last week Standard & Poor’s revised their outlook on Zuffa’s credit rating from stable to negative. Zuffa’s bonds currently carry a BB rating which means that Zuffa is less vulnerable in the near term than other lower-rated obligors. However, it faces ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to obligor’s inadequate capacity to meet its financial committments. Bonds rated BB and below are consider junk bonds due the risk of failure associated with the companies that issue them. S&P analysis below, with emphasis added in red:

“The outlook revision reflects Zuffa’s weak operating results over the six months ended June 30, 2007, which were meaningfully below our prior expectations,” said Standard & Poor’s credit analyst Guido DeAscanis III. In particular, the company incurred significantly higher operating costs, primarily related to its initiative to extend the Ultimate Fighting Championship (UFC) brand into the U.K.

Zuffa is the world’s largest promoter and producer of Mixed Martial Arts (MMA) sporting events through its UFC, World Extreme Cagefighting, and Pride Fighting Championship (Pride). UFC is the company’s flagship brand and the primary contributor to consolidated revenues and cash flow. Total debt outstanding as of June 30, 2007 was $325 million.

The ratings reflect the company’s relatively short operating history, potential revenue and cash flow volatility given its primarily event-driven business model, and vulnerability to changing consumer tastes. These risks partly are offset by the company’s historical success in growing its UFC brand, healthy free cash flow conversion, and modest expected debt leverage. Zuffa produces live and taped MMA content which is distributed primarily through pay-per-view and cable television. Roughly 75% of revenues are event based and depend largely on the number of pay-per-view buys and, to a lesser extent, tickets sold at the gate for the company’s MMA contests. The other 25% of revenues are committed through contractual arrangements with Viacom Inc.’s Spike TV channel, which extends through 2008, and various sponsors.

Got something to say?

You must be logged in to post a comment.