NEW YORK, Oct. 1, 2009?Standard & Poor?s Ratings Services said today it assigned its issue-level and recovery ratings to the proposed $100 million senior secured incremental term loan being issued by Zuffa LLC. The loan was rated ?BB-? (at the same level as the corporate credit rating on the company) with a recovery rating of ?4?, indicating our expectation of average (30% to 50%) recovery for lenders in the event of a payment default.
At the same time, we revised our recovery rating on Zuffa?s existing senior secured credit facilities to ?4? from ?3?.
?The revised recovery rating reflects a revision of our expected emergence multiple to 4.5x from 5.0x, in addition to the greater amount of debt outstanding in the capital structure,? said Standard & Poor?s credit analyst Ben Bubeck.
We also affirmed our issue-level rating on these loans at ?BB-? (at the same level as the ?BB-? corporate credit rating on the company), in accordance with our notching criteria for a ?4? recovery rating. (To see the complete recovery analysis, see Standard & Poor?s recovery report on Zuffa LLC, to be published as soon as possible on RatingsDirect following this report.)
Net proceeds from the proposed incremental term loan will be used to repay the outstanding balance under the company?s revolving credit facility and to fund a dividend to the owners. Leverage will increase moderately as the result of this transaction. However, our rating affirmation reflects solid operating results in recent quarters given consistently strong EBITDA margins and continued success in improving the profitability of international operations, which meaningfully improved credit measures. Pro forma for the proposed transaction, credit measures remain in line with the current rating.
The ?BB-? rating on Zuffa reflects the risk of revenue and cash flow volatility given the company?s primarily event-driven business model, its vulnerability to changing consumer tastes or the effect of weak economic conditions on consumer discretionary spending, a relatively short operating history, and management?s aggressive financial policy. Zuffa?s well-recognized Ultimate Fighting Championship (UFC) brand, healthy free cash flow conversion given strong EBITDA margins and modest capital intensity, and moderate debt leverage partly offset these risks.
COMPANY REMAINS EVENT DRIVEN ? Revenue breakdown remains at 75/25 event (pay-per-view, gate) to non-event (television rights fees, sponsorships, etc), but the successful launch of the video game as well as recent improvement in the sponsorship portfolio has the potential to improve that ratio.
MORE CONSISTENT MARGINS ? EBITDA margins have stabilized as the company's international operations have improved.
STRONG CASH FLOW ? Cash flow remains strong, however, the company's $25M credit revolver was fully drawn as of June 30, 2009.
AGGRESSIVE DIVIDEND PAYMENTS ? Dating back to the company's original loan, dividend payments to the owners have been an issue for creditors and they are limited by a restricted payment basket in the terms of the loan. The initial dividend was characterized as quite aggressive and the current dividend payment (roughly $75M) would "consume a large portion of [the] current basket," however, the basket has the potential to increase each quarter.
RECOVERY OUTLOOK REMAINS STABLE ? "Given management's relatively aggressive posture toward dividends, an outlook revision to positive or ratings upside potential is limited over the intermediate term, despite the likelihood for some improvement to credit measures over the next several quarters."