As UFC 249 and subsequent events were shut down by Disney, the company’s debt ratings may take a dip according to S&P Global Ratings.
According to Forbes, Endeavor Operating Co., LLC and UFC Holdings, LLC were put on credit watch negative because of the impact of event cancellations during the coronavirus outbreak. The UFC planned on running UFC 249 from Tachi Palace in Lemoore, California this Saturday but late last week White announced that he was told to stand down from running that event and others.
S&P placed all ratings on Endeavor and UFC, including the “B” issuer credit rating on CreditWatch with negative implications. Thus, per Forbes, the junk bond ratings could be lowered. S&P cited concerns over EBITDA and liquidity. The company entered into a $465 million leveraged loan this past September. The loan was added to its existing $1.875 billion term loan B that matures in 2026. The term loan B had been trading well on the US secondary market which seemed to spur the additional loan. Also, the favorable credit rates at the time in the US promoted the additional loan.
One might infer that the UFC-ESPN media deal helped with the company obtaining the loans. But, without new live events to push out for ESPN, the company is facing some uncertain times. According to a Wall Street Journal article last week, it has to put on 42 events to make $750 million on its ESPN contract for 2020.
Payout Perspective:
The credit watch from S&P Global is premised upon an examination of those companies “vulnerable to economic downturns, because of high leverage or weak business models, as well as those with immediate financing needs such as those with weaker liquidity, tight covenants, or near-term maturities.” Here, Endeavor and UFC Holdings are highly leveraged due to its loan and weaker liquidity. You can debate about the business model because it was working but for the shutdown of events. Recall that in February, it sent out dividends to its investors. The UFC had its best financial year in 2019. While that money could have been redistributed to the business, it was earmarked for investors from the outset. Now, the loans that Endeavor and UFC are sitting on will likely be rated lower than junk bonds which is not ideal for the company.
Endeavor and UFC’s current debt issues is a cautionary tale about the use of debt in a business plan. While one might not have foreseen a total shutdown of business, the lack of liquidity on hand (i.e., actual cash) has to be a concern. Floating on debt looked to be a fine way to handle and grow business, but when it comes down to it, the old adage of saving for a rainy day might have made sense.
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