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Rating Action:

Moody's assigns Ba3 CFR to Diamond Sports Group; outlook stable

09 Jul 2019

New York, July 09, 2019 -- Moody's Investors Service ("Moody's") today assigned a Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR) to Diamond Sports Group, LLC ("Diamond"). Concurrently, Moody's assigned a Ba2 rating to Diamond's $3,300 million term loan B, its $650 million revolver, and its proposed $2,550 million senior secured notes as well as a B2 rating to Diamond's proposed $2,325 million of senior unsecured notes. Moody's also assigned the company a speculative grade liquidity rating (SGL) of SGL-2. The outlook is stable.

Diamond is a 100% subsidiary of Sinclair Broadcast Group, Inc. (Ba3, stable) and will be the acquiring entity of 21 regional sports networks (RSN) which Sinclair agreed to purchase from Walt Disney Company (The) ("Disney", A2 stable) back in May 2019. The current financing, along with around $1.4 billion of cash and $1 billion of preferred equity will total around $10.5 billion which will be used to purchase the RSNs for around $9.6 billion, finance some put options triggered by the change of control and inject around $774 million of cash on Diamond's balance sheet in anticipation of further tuck-in RSN related M&A and further put options.

Assignments:

..Issuer: Diamond Sports Group, LLC

.... Corporate Family Rating, Assigned Ba3

.... Probability of Default Rating, Assigned Ba3-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

....Gtd Senior Secured Term Loan B, Assigned Ba2 (LGD3)

....Gtd Senior Secured Revolving Credit Facility, Assigned Ba2 (LGD3)

....Gtd Senior Secured Global Notes, Assigned Ba2 (LGD3)

....Gtd Senior Unsecured Global Notes, Assigned B2 (LGD5)

Outlook Actions:

..Issuer: Diamond Sports Group, LLC

....Outlook, Assigned Stable

RATINGS RATIONALE

Diamond's Ba3 rating reflects the company's (1) strong business model with around 90% of revenue derived from per-subscriber fees charged to multichannel video programming distributors (MVPD) which carry the RSNs; (2) large subscriber base estimated at 74 million and a strong share of viewing for sports compared to other genres of TV content; (3) large network of RSNs giving it a nationwide footprint with all league sports represented which mitigates both seasonality and reliance on specific team performance; (4) very long-term nature of the contractual agreements with the RSN teams.

The Ba3 rating also reflects (1) the company's high leverage with Moody's adjusted debt to EBITDA expected around 5.3x for 2019 pro-forma for the acquisition; (2) the negative trends seen in MVPDs' subscriber base with declines expected around 2% in 2019; (3) long term obligations from fixed payment terms of most team contracts; (4) risk of further debt funded M&A in the medium term.

Part of the financing will also include $1,025 million principal amount of preferred shares issued at Diamond Sports Holdings LLC. The preferred shares meet Moody's criteria for equity treatment under Moody's Hybrid Methodology (https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125264) and have been excluded from Moody's adjusted debt and from the waterfall of claims analysis which forms part of Moody's Loss Given Default (LGD) Methodology. Sinclair has stated that it would be open to selling part of the RSN business to strategic equity partners. As part of any future potential sale transaction, Moody's would expect the company to repay the preferred shares through common equity.

Unlike other programming genres like entertainment and reality, which have shown declines in audiences across the board, local news and sports continue to attract a captive audience. With 14 RSNs (15 once Sinclair-Cub joint venture Marquee is added) Diamond will be the largest RSN owner by a wide margin (number two Comcast Corporation (A3 stable) owns 7). This gives it a wide national footprint which should mitigate its exposure to individual local teams' performances. Moody's expects the company to benefit from Sinclair's existing relationships with major MVPDs.

Diamond's RSNs are present in 15 out of the top 25 designated market areas. According to the company's estimates, the RSNs reach approximate 75 million of subscribers. The large majority of the revenue derive from the RSNs come from retransmission fees paid by cable operators and other MVPDs to Diamond. These are typically paid on a per-subscriber basis and contracted over 3-5 years with agreed escalation in the fees. In recent years, traditional MVPD subscribers have declined as virtual MVPDs and OTT platforms have gained market share. Moody's expects this trend to continue and estimates a low single digit decline in MVPD subscribers (including virtual MVPDs) in 2019. Furthermore growth in RSN revenue hinges on the ability of Diamond to continue to increase retransmission fees. Currently, most of the RSNs are offered on near-entry packages of cable operators and are hence included in a large number of subscriber packages. Should the RSNs suddenly be marketed as a standalone add-on to video packages, pricing would need to be reassessed to make up for what would likely be a sharp drop in subscribers.

A number of RSNs are held in joint ventures (JV) between Diamond and one of the sports team covered by that RSN. These JVs offer the teams an opportunity to share in the upside and allow Sinclair to reduce its fixed contracted upfront payment. The RSN entities held in a JV will not be guarantors to the new debt instruments and will not serve as collateral for the secured credit facilities and secured notes. Diamond's equity interests in the JVs will be pledged to the secured debt holders and the holders of the equity interests will be guarantors under the secured credit facilities, secured notes and unsecured notes. While these JVs currently represent less than 25% of Diamond's assets, any future increase in the proportion of JVs and further declines in the proportion of guaranteeing subsidiaries might have an impact on the relative notching of the various debt instruments. Moody's includes the dividends received from these JVs in Diamond's EBITDA (but excludes the net results of these JVs).

Diamond has a good liquidity profile. At closing of the transaction, the company will have a large cash balance of $774 million. However, some of it has been earmarked for a potential investment and $376 million to fund a potential put option which could be exercised by one of the JVs by Q1 2020. The company's revolving credit facility of $650 million is expected to remain undrawn and will require compliance with a springing leverage covenant of 5.9x to be tested when utilization reaches 35%. The company is expected to be highly cash generative with Moody's estimating free cash flow at around $1 billion in 2020.

The stable outlook reflects Moody's expectations that the company's strong free cash flow generation will allow the company to reduce the currently high leverage within the coming year, in line with its stated leverage guidance of 4-4.5x. The stable outlook also assumes that any further M&A activity will be funded in line with that leverage guidance.

WHAT COULD CHANGE THE RATING UP/DOWN

Ratings could be upgraded if leverage were sustained comfortably below 4.25x and free cash flow to debt (Moody's adjusted) were to be sustainably maintained above 10%. A positive rating action would also be contingent on maintaining good liquidity.

Ratings could be downgraded if leverage were to exceed 5.5x, or free cash flow-to-debt (Moody's adjusted) were to be sustained materially below 10%.

The principal methodology used in these ratings was Media Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

Christian Azzi
VP-Senior Analyst
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

Lenny J. Ajzenman
Associate Managing Director
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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