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Rating Action:

Moody's affirms UFC Holdings' B2 CFR and downgrades the 1st lien term loan to B2 due to proposed change in debt structure; outlook remains Stable

10 Apr 2019

New York, April 10, 2019 -- Moody's Investors Service (Moody's) affirmed UFC Holdings, LLC's (UFC) B2 corporate family rating (CFR) and downgraded the upsized 1st lien term loan to B2 from B1. The outlook remains stable.

UFC is expected to increase the size of the 1st lien term loan by $435 million which will be used to repay the existing $425 million 2nd lien term loan and pay transaction related expenses. The transaction will increase pro forma leverage slightly to 7.8x from 7.7x as of Q4 2018, but leverage is expected to decline to the mid 5x range by the end of 2019 as the new media contract with ESPN drives growth. The revolving credit facility will be upsized to $162.75 million from $150 million and the maturity date will be extended one year to 2022. The upsize of the 1st lien term loan to repay the existing 2nd lien term loan will result in an all first lien debt structure which led to the downgrade of the 1st lien rating to B2 and in line with the B2 CFR. The rating on the existing 2nd lien term loan and revolving credit facility will be withdrawn after the closing of the transaction.

The following is a summary of today's actions:

Affirmations:

..Issuer: UFC Holdings, LLC

.... Corporate Family Rating, Affirmed B2

.... Probability of Default Rating, Affirmed B2-PD

Downgrades:

..Issuer: UFC Holdings, LLC

....$1,877 million Senior Secured 1st lien Term Loan due 2023, Downgraded to B2 (LGD4) from B1 (LGD3)

Assignments:

..Issuer: UFC Holdings, LLC

....$162.75 million Senior Secured 1st lien Revolving Credit Facility due 2022, Assigned B2 (LGD4)

Outlook Actions:

..Issuer: UFC Holdings, LLC

....Outlook, Remains Stable

RATINGS RATIONALE

UFC Holdings, LLC's (UFC) B2 CFR reflects very high pro forma leverage of 7.8x as of Q4 2018 (including Moody's standard adjustments) but is expected to decline materially in 2019 as the impact of the new media and pay per view (PPV) contracts with ESPN are reflected in the results. The US media agreement with ESPN replaces the existing agreement with Fox that ended in 2018 and is expected to lead to a material increase in revenue and EBITDA. UFC also recently entered into an agreement with ESPN for the domestic residential PPV rights for the next seven years and extended the media rights agreement out to seven years from five years. While the media rights deal is projected to lead to a material increase in revenue and EBITDA for the company, the PPV agreement is expected to dramatically reduce the volatility of the business. Historically, results were heavily impacted by the strength of the fight card and last minute changes to the event due to fighter injuries or suspensions. The new PPV agreement dramatically lowers the level of volatility and impact from the retirement of popular fighters, although it may also reduce the upside potential. UFC benefits from its position as the largest mixed martial arts (MMA) promotion company, although we expect competition in the industry will continue to increase. UFC's competitive position is enhanced by its first mover advantage in structuring and organizing the sport, growing fan interest and loyalty with respect to UFC, brand strength in MMA, and its large contractually bound pool of fighters with strong opportunities for exposure and profit. Above average operating margins reflect the company's ability to leverage its existing premium MMA brand and supports free cash flow generation. Increases in contractual media rights revenue will contribute meaningfully to EBITDA growth and we expect the company will have the opportunity to renew international media rights deals at higher levels following the media rights deal in the US.

The PIK preferred equity (which is not included in our debt calculation) increases the potential for cash flow or additional debt to be used to repay the preferred equity over time. We also expect UFC to benefit from WME IMG, LLC's (which is a subsidiary of the parent company) relationships and capabilities to support growth and increase international expansion opportunities over the investment horizon. UFC is contractually bound to pay $25 million in annual management fees to WME IMG, LLC.

Moody's anticipates that UFC will maintain an adequate liquidity profile over the next twelve months with a cash balance of $91 million as of Q4 2018 at the guarantor entity. The company will also have an undrawn revolving credit facility that was upsized to $162.75 million from $150 million and the maturity date of the revolver was extended one year to 2022. UFC is projected to generate free cash flow as a percentage of debt of almost 10% in 2019 given the limited capex requirement of the business. We expect a portion of free cash flow may be directed to acquisition consideration payments, partner distributions related to tax reimbursement payments, or used to help repay the preferred equity shares outstanding. The term loan is covenant lite and the proposed revolver contains a 6.5x maximum first lien leverage ratio when more than 35% of the revolver is drawn. Endeavor Operating Company, LLC is subject to a $75 million contingent acquisition payment upon the achievement by UFC of $350 million of LTM EBITDA.

The stable outlook reflects our expectation for significant growth in revenue and EBITDA with less volatility due to the new media and PPV agreements with ESPN. While leverage is high, we expect it to decline to the mid 5x range by the end of 2019 absent any additional debt issuance.

An upgrade could occur if leverage declines below 5x (including Moody's adjustments) with continued positive revenue and EBITDA growth as well as a good liquidity profile. Confidence would also be needed that the financial policy of the company would be consistent with a higher rating level and the preferred equity and acquisition consideration obligations were repaid.

Moody's could downgrade UFC's ratings if the company failed to reduce leverage below 7x (including Moody's adjustments) by the end of 2019 as a result of additional debt issuance. A weak liquidity position or elevated concern about its ability to remain in compliance with its financial covenants could also lead to a downgrade.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

UFC Holdings, LLC is the world's leading promoter of mixed martial arts (MMA) sports competition events. MMA is an individual combat sport with international appeal, which combines techniques from various combat sports and martial arts, including boxing, karate, judo, jiu-jitsu, kickboxing, and wrestling and is governed by the "Unified Rules of MMA". Endeavor Operating Company, LLC is the majority shareholder. Revenues for 2018 were well over $600 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Scott Van den Bosch
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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