In a press release sent out last week, Standard & Poor’s Global assigned a rating for the debt involved in the acquisition of the UFC by a group led by WME-IMG. Moody’s Investor Service has sent out its own press release with more details related to the leveraged debt in the acquisition.
Per the July 22, 2016 release, Moody’s assigned VGD Merger Sub, LLC (aka UFC Holdings, LLC) a B2 corporate family rating and the proposed $150 million revolver and $1,300 million first lien term loan a B1 rating. The rating is assigned to those investments with a high credit risk and are based on speculation. The outlook, per Moody’s is seen as stable.
While Moody’s has a pretty optimistic outlook on the future of the company, it will not adjust the rating any time soon until the debt leverage is reduced.
UFC Holdings, LLC will be the rated entity after the transaction is complete. The Moody’s release broke down the money covered in this transaction:
- $1,420 million in new equity
- $325 million in rollover equity from management and existing investors
- $400 million of preferred equity
- $1,300 million in new first lien term loans
- $500 million second lien term loans or unsecured debt.
When the company determines if the $500 million will be in the form of a second lien term loan or an unsecured note, Moody’s will assign a rating to the debt offering.
Moody’s expects that the UFC will maintain a “good liquidity profile over the next twelve months with an expected cash balance of about $30 million following the close of the transaction and an undrawn $150 million revolving credit facility due 2021.”
Similar to the Standard & Poor’s projections, Moody’s cites the upcoming rights fee agreement as a positive for the company when considering its prospective business outlook. Despite the high debt, analysts believe that this shall contribute to an ascending EBITDA.
Also to note from Moody’s:
WME Parent is subject to a $175 million contingent acquisition payment upon the achievement of $275 million in EBITDA (but not earlier than June 30, 2017) and $75 million payable upon achieving $350 million of LTM EBITDA (but not earlier than December 31st 2018).
The stable outlook reflects Moody’s expectation that UFC’s EBITDA will continue to improve following a strong year in 2015 driven by PPV revenues, increased digital revenues, and contractual domestic and international television rights fees. While leverage is very high, we expect it to decline below 7x by the end of 2018.
The report warns of a possible downgrade if leverage is not below 7x by the end of 2018. It also states that there would be negative rating pressure if fee cash flow is used for returns to equity holders instead of debt repayment.
Payout Perspective:
The report notes that the legalization of MMA in New York and the success of UFC Fight Pass improved the outlook for the company. The fact that the UFC is the largest MMA organization in the sport is a positive for analysts that see “high barriers to entry” to competition. It also cites a strong brand and “its large contractually bound pool of fighters with superior opportunities for exposure and profit.” The report also notes that the UFC has mitigated its concern over injured fighters which caused a downturn in PPV revenues in 2014. Overall, despite the amount of debt used to purchase the UFC, it is seen as a good prospective purchase with the belief that the company will continue with its improving revenues.
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