Fed gives second reprimand to Goldman over UFC deal
December 2, 2016
Bloomberg reports that Goldman Sachs Group Inc. (Goldman Sachs) has been reprimanded by Federal Reserve regulators for the second time due to its debt deal to purchase the UFC for $4 billion. Regulators consider the loans as “substandard.”
In addition to Goldman Sachs, Deutsche Bank AG, which was the lead underwriter for the junior portion of the deal also has been notified by regulators.
Goldman Sachs had appealed an earlier warning about its deal structure which included add-backs to increase the earnings before interest, taxes, depreciation and amortization (EBITDA). The EBITDA for the UFC was placed at $170 million but then rose to an estimated $300 million when presented to debt investors to finance the sale. The higher EBITDA allowed for WME-IMG to borrow $1.8 billion for the deal. According to a Wall Street Journal article, future “step up payments” for future television contracts and other licensing agreements were factored into bringing the EBITDA up to $300 million. Notably, the UFC has made it public that they will be seeking a $450 million per year television contract once its current agreement with FOX ends in 2018.
With yields for the UFC loans at 8.5%, investors were eager to purchase the debt. The demand was so high, that the UFC lowered the interest rate on the junior debt twice the week the loans went to market.
The concern with the sale is the “add-backs” which were factored into the profitability of the company. If the balance sheet provides too much of a flowery outlook, investors might be led astray. A company inflating their cash flow projections would appear to be able to take on more debt due to its liquidity. But, if the projections are not realistic, there is the concern for a default. Investors are looking for high yields to make money and this deal, with its yield on loans, is enticing despite the fed warnings. We shall see with a new administration coming in January, if these type of deal structures will continue to be pursued.