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Rating Action:

Moody's assigns UFC Holdings' 2nd lien term loan Caa1; B2 CFR affirmed

27 Jul 2016

New York, July 27, 2016 -- Moody's Investors Service (Moody's) assigned VGD Merger Sub, LLC's (aka UFC Holdings, LLC (UFC)) proposed 2nd lien term loan a Caa1 rating. The B2 corporate family rating (CFR) and B1 rating for the proposed $150 million revolver and $1,300 million 1st lien term loan were both affirmed. The outlook remains stable.

The use of proceeds is to help fund the acquisition of Zuffa, LLC (UFC Holdings, LLC will be the rated entity following the close of the transaction) by WME Entertainment Parent, LLC (WME Parent) in partnership with Silver Lake Partners and Kohlberg Kravis Roberts & Co. We expect the transaction will be funded with $1,420 million in new equity, $325 million in rollover equity from management and existing investors, $400 million of preferred equity, $1,300 million in new 1st lien term loans and $500 million of 2nd lien term loans.

The existing ratings at Zuffa, LLC including the Ba3 CFR and the Ba3 rated senior secured credit facility that is on review for downgrade will be withdrawn upon repayment of the outstanding debt.

Initially the rating is expected to be assigned to VGD Merger Sub, LLC and then to UFC Holdings, LLC upon closing.

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

Issuer: initially VGD Merger Sub, LLC and then UFC Holdings, LLC

$500 million senior secured 2nd lien term loan due 2024, Assigned Caa1 (LGD5)

...$150 million senior secured revolving credit facility due 2021, Affirmed B1 (LGD3)

...$1,300 million senior secured 1st lien term loan due 2023, Affirmed B1 (LGD3)

Corporate Family Rating, Affirmed B2

Probability of Default Rating, Affirmed B2-PD

Outlook, Stable

RATINGS RATIONALE

UFC's B2 CFR reflects the very high leverage of 8.5x (including Moody's standard adjustments) pro-forma for the transaction which weakly positions the company at the existing ratings. Leverage will decline from good EBITDA growth over the projection period, but we expect leverage levels will remain high which increases vulnerability to operational underperformance. Also reflected in the rating, is the $400 million in PIK preferred equity which will increase the potential for cash flow or additional debt to be used to repay the preferred equity over time. The rating receives strength from its position as the largest mixed martial arts (MMA) promotion company. This strong competitive position is protected by high barriers to entry, which include UFC's 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 superior opportunities for exposure and profit. Above average operating margins reflect the company's ability to leverage its existing premium MMA brands and supports free cash flow generation. Contractual media rights revenue increases over the next several years should contribute meaningfully to EBITDA growth and we anticipate UFC will benefit from higher media rights contracts after the existing agreements end in 2018. Growth is also expected from its digital subscription offering as well as the recent legalization of professional MMA in the state of New York. The company's results in 2014 were heavily impacted by a slew of big name fighter injuries prior to the events which caused pay per view revenues to decline significantly below historical years. Results have dramatically improved since then and we anticipate new strategies to help mitigate the impact of injuries or last minute changes to the scheduled fight card. We also expect UFC to benefit from WME IMG, LLC's vast relationships and capabilities which is expected to lead to cost savings, additional revenue opportunities, and increase international expansion over the investment horizon. However, UFC is expected to pay $25 million in annual management fees to WME parent's subsidiary, WME IMG, LLC's (B2 CFR) restricted group.

Moody's anticipates that UFC will maintain a good liquidity profile over the next twelve months with an expected cash balance of about $30 million following the close of the transaction and an undrawn $150 million revolving credit facility due 2021. Despite the high leverage, UFC is expected to generate good free cash flow given the limited capex requirement after the company's new headquarters is completed in the first half of 2017. The term loan is expected to be covenant lite and the revolver will contain a maximum first lien leverage ratio when more than 30% of the revolver is drawn. We project the company will make modest partner tax distributions over the investment horizon. WME Parent is subject to a $175 million contingent acquisition payment upon the achievement of $275 million in EBITDA (but not earlier than June 30, 2017) and $75 million payable upon achieving $350 million of LTM EBITDA (but not earlier than December 31, 2018).

The stable outlook reflects our expectation that UFC's EBITDA will continue to improve following a strong year in 2015 driven by PPV revenues, increased digital revenues, and contractual domestic and international television rights fees. While leverage is very high, we expect it to decline below 7x by the end of 2018.

Given the high leverage level which weakly positions the existing rating, an upgrade in the near term is not likely. However an upgrade could occur if leverage declines below 5x with continued positive revenue and EBITDA growth as well as a good liquidity profile. In addition, confidence would be needed that there were not any equity friendly or leveraging transactions expected.

Failure to reduce Moody's adjusted leverage below 7x by the end of 2018 could lead to a downgrade. A financial policy that leads to free cash flow being used for returns to equity holders instead of debt repayment would also increase negative rating pressure. A weak liquidity position, elevated concern about the ability to service its debt or further leveraging transactions would also lead to a downgrade.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodologies.

UFC Holdings, LLC (aka Zuffa, 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 wresting and is governed by the "Unified Rules of MMA". Revenues for 2015 were 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: 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

No Related Data.
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