S&P Global reaffirms UFC Holdings, LLC debt rating, outlook
April 17, 2017
S&P Global Ratings reaffirmed UFC Holding’s first lien “B+” rating after news of seeking $100 million in additional loans. Due to its high leverage, S&P rated UFC Holdings, LLC as having a negative outlook.
For a definition of S&P’s ratings, look here. A “B” rating is characterized as, “more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.”
The UFC plans to use the additional loans for “earn-outs” and other payments to the Fertitta brothers and Flash Entertainment, the previous owners of the UFC, if the UFC achieves certain benchmarks with its EBITDA “sometime this year.” As indicated last year, the company must achieve $275 million EBITDA within 12 months. In the following 12 months, it must achieve $350 million EBITDA to achieve a monetary benchmark.
S&P noted that through 2018, it expects an adjusted leverage above 9x which is “pro-forma” for the additional $100 million term loan add-on. But, it adds that the company has a “plausible and robust growth path.” Thus, S&P affirmed its “B” corporate credit rating on UFC Holdings, LLC and “B+” issue-level rating on the company’s $1.475 billion first-lien term loan due 2023.
In July 2016, UFC Holding’s LLC was given a “B” rating and a negative outlook on a $1.45 billion first lien loan to acquire Zuffa, LLC. As we wrote back in July, “the financing for the deal to acquire the UFC will consist of the $1.45 billion credit facility which will consist of a $150 million revolver due 2021 and a $1.3 billion term loan B due 2023.”
According to the S&P report, it affirmed its “CCC” rating for the second-lien term loan of $425 million due in 2024.
Also of note, WME-IMG will receive $25 million in an annually management fee. It also states that an upgrade in rating will not occur prior to a new domestic media rights contract is renegotiated.
The report notes that while the UFC has a strong appeal to the 18-34 demo, “it needs to continue to develop fighters” that appeal to this target demo.
Prior to the acquisition by WME-IMG, in November 2015 Zuffa, LLC had a company corporate rating of BB and its outlook was stable. This was an upgrade in outlook which was previously negative.
The report from S&P Global Ratings came out on April 4th.
As in July, S&P seems optimistic on UFC Holdings, LLC and its ability to repay the debt (at least for the first-term loan). The report notes that the WME-IMG and its other investors may provide “temporary” financial support in the event of unexpected financial difficulty. This may attribute to the rating in comparison to previous ratings for Zuffa, LLC. Despite the additional loan capacity, UFC Holdings, LLC’s rating did not slide and it still projects a negative outlook for the holding company. Obviously, with the increase in debt capacity the negative outlook seems warranted. Then there is the issue, or nonissue, of the company’s EBITDA. Federal regulators announced concerns with the “add-backs” included in its EBITDA forecast. The projected EBITDA forecast appears to be linked to the belief that it will increase its media rights deal. WME-IMG has reduced costs since taking over which was highlighted by the reduction of the UFC work force which should please investors looking to scoop up its debt. The S&P report seems bullish on its EBITDA noting a “plausible and robust growth path.” B