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Rating Action:

Moody's assigns Ba3 rating to Zuffa's (Ba3 CFR) new bank debt; rating outlook changed to stable

07 Feb 2013

New York, February 07, 2013 -- Moody's Investors Service assigned a Ba3 (LGD4, 51%) rating to Zuffa, LLC's (Zuffa) (Ba3 Corporate Family Rating) new senior secured credit facility, comprising a $60 million 5-year revolving facility and a $450 million 7-year Term Loan B. Net proceeds will be used to refinance its existing debt, including a $463 million senior secured Term Loan B due 2015 (rated Ba3) and $50 million revolver maturing in 2015. Moody's also changed Zuffa's rating outlook to stable from positive due to higher than expected volatility in the company's revenue and profits, as well as higher leverage. The company's Ba3 CFR and Ba3-PD PDR (Probability of Default Rating) remain unchanged.

In Moody's view, the company's cash flow volatility is due to the reliance on a few number of sporting events per period and the consequent vulnerability to the underperformance or cancellation of any single event. The cancellation of one of the ten planned pay-per-view (PPV) events in North America in 2012 led to material EBITDA underperformance for Zuffa, despite the significantly higher television broadcast rights fees garnered in the year. While the company has made important strides in the diversification of its revenue sources and increase in contractual revenue, particularly through its multi-year television licensing deal with Fox in 2011, over half of its revenue is still derived from PPV events. In addition, Zuffa's PPV events have experienced declining buys per event at the same time the company has increased the number of live broadcast and cable television events. We believe that increased television programming may continue to dampen growth in PPV revenue in the coming years. .

As a result of the unexpected challenges in 2012, the company's debt-to-EBITDA leverage (including Moody's standard adjustments) increased to 4.6x at year end 2012 from 3.3x in 2011, instead of declining to under 3.0x as was expected earlier in the year. This volatility in credit metrics constrains the company's ratings to the Ba3 category, despite its substantial growth opportunities in international markets and contracted increases in television rights fees well into the intermediate term. In the absence of further unanticipated challenges, we expect Zuffa to de-lever steadily over time to under 3.0x based on solely EBITDA growth. However, we believe that management is likely to utilize the incremental debt capacity under its current rating to invest in acquisitions or other growth opportunities, or increase distributions to its owners as it has done in the past, and maintain leverage above 2.5x.

The following is a summary of today's rating actions:

Assignments:

Issuer: Zuffa, LLC

.$450 million Sr. Secured Term Loan B due 2020, Assigned Ba3 (LGD4, 51%)

.$60 million Sr. Secured Revolving Credit Facility due 2018, Assigned Ba3 (LGD4, 51%)

Outlook Changes:

Issuer: Zuffa, LLC

.Rating Outlook Changed to Stable from Positive

RATING RATIONALE

Zuffa's Ba3 CFR reflects its premium MMA platform and brands, strong free cash flow and superlative international revenue growth prospects in the expanding sport of MMA, as well as the risks associated with the company's revenue concentration on a limited number of events and the resultant potential for volatility in credit metrics. The rating considers the company's first mover advantage and the growing popularity of UFC, with its relative large scale and brand strength in MMA, and its large contractually bound pool of fighters with superior opportunities for exposure and profit, which help serve as an effective barrier to entry. However, the rating also considers the still fairly limited tenor of the sport relative to other established sports, Zuffa's small size and dependence on pay-per-view event revenues that are vulnerable to numerous variables including the timing of events, fighter injuries and the popularity of matchups. . The rating is supported by management's commitment to maintain a moderate amount of debt and leverage, although we expect the company to pursue acquisitions or other growth opportunities within the bounds of its debt capacity under its current rating. Though the majority owners have significant financial resources, they have a history of speculative financial-risk tolerance, which constrains the rating to the Ba category.

The stable outlook reflects Zuffa's continued growth opportunities driven by increasing revenue contributions from key sponsorships, licensing, and domestic and international television rights fees. The outlook accounts for potential volatility in the company's credit metrics depending on timing and performance of its individual events, though we expect leverage to trend downwards through EBITDA growth over the next 12-18 months.

Ratings could be upgraded if the increasing mainstream acceptance of the MMA sport continues while the company demonstrates consistent revenue growth and stable margin characteristics, such that it can sustain leverage under 2.5x and free cash flow-to-debt of above 20%. Continued revenue diversification and an increase in contractual revenue that reduces volatility in operating metrics will be important factors when considering a rating upgrade.

Significantly lower revenue and free cash flow growth over an extended period due to possible reduced fan affinity, or a major dividend or debt financed acquisition resulting in debt-to-EBITDA being sustained over 4.0x could result in a downgrade of the rating. An unusual or disrupting event such as a terrorist act or a natural disaster affecting the operations of the company, or an adverse legal judgment not mitigated by insurance proceeds nor free cash flow could place the ratings under downward pressure as well.

Zuffa's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Zuffa's core industry and believes Zuffa's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns Ba3 rating to Zuffa's (Ba3 CFR) new bank debt; rating outlook changed to stable
No Related Data.
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