UFC Holdings 'B+' First-Lien Rating Affirmed On $435 Million Term Loan Add-On To Fund Second-Lien Term Loan Repayment


NEW YORK (S&P Global Ratings) April 10, 2019--S&P Global Ratings today affirmed its 'B+' issue-level rating and '2' recovery rating on UFC Holdings LLC's first-lien debt after the company announced plans to upsize its first-lien term loan due 2023 by $435 million to $1.877 billion outstanding and increase its revolving credit facility's capacity to $162.75 million from $150 million. The company will also seek to extend the revolver's maturity to 2022 from 2021 as part of the proposed transaction. The '2' recovery rating remains unchanged, indicating our expectation for substantial recovery (70%-90%; rounded estimate: 70%) of principal in the event of a payment default. UFC plans to use the proceeds from the incremental first-lien term loan to fully repay its $425 million second-lien term loan and pay associated transaction fees.
We affirmed our issue-level rating on UFC's first-lien debt despite the increase in its first-lien debt balance because we raised our emergence valuation for the company to reflect its augmented domestic media rights agreement between the company and ESPN, which was announced in March 2019. Under the agreement, UFC will exclusively distribute its pay-per-view (PPV) bouts in the U.S. through ESPN+ in return for fixed media rights fees. This is in addition to the company's non-PPV bouts, which it already distributes through ESPN. UFC and ESPN also extended the duration of the distribution agreement they reached in May 2018 (which covered only non-PPV bouts) to seven years from five years. UFC estimates that about 70% of its total 2019 pro forma revenue will be contractually fixed, which compares with less than 40% previously. This will mitigate the company's business risks by replacing the volatile revenue from its event-driven PPV business model with a fixed-fee revenue stream. The longer, seven-year duration of the distribution agreement also enables UFC to plan its next steps over a longer time horizon while focusing on securing international media rights fees and generating sponsorship dollars. We believe the new agreement with ESPN likely reflects the growing acceptance and maturity of mixed martial arts as a sport.
Although revenue risk is reduced over the next several years, a potential long-term risk factor for UFC may be that the new agreement increases the cost of viewership for casual fans who do not currently subscribe to ESPN+. Viewers of PPV bouts would need to subscribe to ESPN+ going forward, compared to previously when they could purchase PPV bouts a la carte through a variety of cable subscriptions. The new agreement could reduce PPV purchases among some casual fans who do not convert into ESPN+ subscribers.
ISSUE RATINGS--RECOVERY ANALYSIS
Key analytical factors
  • We affirmed our 'B+' issue-level rating on UFC Holdings LLC's existing first-lien term loan to reflect the updated first-lien term loan balance of $1.877 billion, which includes a $435 million add-on, and the increased revolving credit facility capacity ($162.75 million). The '2' recovery rating indicates our expectation for substantial recovery (70%-90%; rounded estimate: 70%) of principal in the event of a payment default.
  • The company's preferred equity pay-in-kind (PIK) instrument is structurally subordinated, therefore we do not include it in our recovery analysis.
  • Our simulated default scenario contemplates a payment default occurring in 2022 due to a substantial decline in UFC's cash flow because of a combination of factors. These factors could potentially include an inability to meet minimum event requirements related to the ESPN media right agreements, poorly timed production costs and investments, leveraging cash distributions to shareholders, a failure to retain or recruit key performers, increased competition from new entrants or alternative sports categories, and unsuccessful new business ventures.
  • We assume UFC would reorganize following a default and used an emergence EBITDA multiple of 6.5x to value the company.
  • Following the close of the transaction and the repayment of the second-lien term loan, we will withdraw our 'CCC+' issue-level rating and '6' recovery rating on the company's $425 million second-lien term loan.
Simulated default assumptions
  • Year of default: 2022
  • EBITDA at emergence: $244 million
  • EBITDA multiple: 6.5x
  • Cash flow revolver: 85% drawn at default
Simplified waterfall
  • Net recovery value (after 5% administrative expense): $1.51 billion
  • Obligor/nonobligor valuation split: 100%/0%
  • Estimated first-lien claims: $2.02 billion
  • Recovery range: 70%-90% (rounded estimate: 70%)
Note: All debt amounts include six months of prepetition interest.
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