UFC Holdings LLC First-Lien Rating Lowered To 'B' On Proposed $465 Million Add-On To Fund Preferred Stock Repayment

NEW YORK (S&P Global Ratings) Sept. 9, 2019--S&P Global Ratings today lowered the issue-level rating on Las Vegas-based mixed martial arts promoter UFC Holdings LLC's first-lien debt to 'B' from 'B+' and revised the recovery rating to '3' from '2' as a result of the company's proposed add-on of $465 million to the first-lien term loan due 2026. The lower ratings reflect higher first-lien debt and lower recovery prospects for first-lien lenders in a hypothetical default scenario. We expect the first-lien term loan to have $2.344 billion outstanding after the add-on. The recovery rating of '3' indicates our expectation for meaningful recovery (50%-70%; rounded estimate: 55%) of principal in the event of a payment default. UFC plans to use the add-on proceeds and balance sheet cash to fully repay $537 million of preferred equity outstanding, and to pay associated transaction fees.
The proposed transaction does not affect our forecast for adjusted debt to EBITDA, which is in the high-6x area in 2019 and in the mid-6x area in 2020, because our debt adjustments already incorporated the preferred equity as a debt-like obligation since the time of UFC's acquisition by Endeavor Operating Co. LLC in 2016. Therefore, our view of financial risk and leverage, and the 'B' issuer credit rating and stable outlook on UFC, are unchanged. We expect the transaction to improve adjusted EBITDA coverage of interest expense to mid-2x starting in 2020 from our previous 2x forecast, primarily because of lower interest expense on the first-lien term loan add-on compared to the preferred equity's relatively high 13% paid-in-kind (PIK) interest accrual, which we incorporated as interest expense. Conversely and for the same reason, we expect the transaction to reduce adjusted EBITDA coverage of cash interest expense to the mid-2x area starting in 2020 from our previous mid-3x forecast.
Our emergence valuation on UFC incorporates the current domestic media rights agreement between the company and ESPN.
For our most recent detailed issuer credit rating rationale, please refer to our full analysis on UFC, published Aug. 20, 2019.
RECOVERY ANALYSIS
Key analytical factors
  • 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.
Simulated default assumptions
  • Year of default: 2022
  • EBITDA at emergence: $243 million
  • EBITDA multiple: 6.5x
  • Cash flow revolver: 85% drawn at default
Simplified waterfall
  • Net recovery value (after 5% administrative expense): $1.5 billion
  • Obligor/nonobligor valuation split: 100%/0%
  • Estimated secured commercial debtholder claims: $35.5 million
  • Estimated first-lien debt claims: $2.48 billion
  • Recovery range: 50%-70% (rounded estimate: 55%)
Note: All debt amounts include six months of prepetition interest.
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