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Rating Action:

Moody's changes Formula One's outlook to positive from stable; affirms B2 CFR

03 Dec 2019

London, 03 December 2019 -- Moody's Investors Service ("Moody's") has today affirmed the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) of Alpha Topco Limited (Formula One or the company) and the B2 rating of the senior secured facilities (Term Loan B & Revolving Credit Facility) issued by the company's subsidiary, Delta 2 (Lux) S.a.r.l. The outlook has been changed to positive from stable.

Today's rating action reflects:

• The company's strong trading in 2019 and expected growth in 2020 driven by new contract wins

• The resilient nature of the company's cash flows driven by multi-year contracts and the strength of the Formula One franchise

• Expectations of a satisfactory renewal of the Concorde Agreement with the competing teams and the FIA

• Strong cash conversion and high free cash flow to debt metrics above 10%

RATINGS RATIONALE

The B2 CFR is supported by the company's: (1) highly recognised leading motorsport franchise and well-established global fan base; (2) very strong cash conversion because of low capital spending and tax costs; (3) multi-year contract structures that offer a strong level of revenue predictability; (4) consistent operational track record; and (5) expected deleveraging in 2019 and 2020 from earnings growth.

The rating also reflects the company's: (1) high Moody's-adjusted gross debt/EBITDA of 6.5x as at 30 September 2019; (2) renewal of the current Concorde Agreement, expiring in December 2020, between the company, the competing racing teams and the FIA, the sport's regulator and governing body; (3) dependence on a relatively small number of key events and broadcasting contracts; and (4) need to balance higher-income pay-TV agreements with larger access free-to-air distribution.

Following the acquisition of Formula One by Liberty Media Corporation in 2017 the company has undergone a period of investment focused on strengthening commercial development, enhancing the digital strategy and increasing the attractiveness of the sport. This has driven improved trading performance in 2019, alongside the benefits of a substantial increase in broadcasting income following the start of a new contract with Sky Limited (A3 stable) in the UK. Further growth is expected in 2020 driven by new contracts wins over which there is strong contractual visibility. The company may face some revenue challenges in 2021 due to the timing of TV contract renewals however the strength and attractiveness of the Formula One franchise provides some protection in the context of wider broadcasting market challenges.

The company is in advanced stages of negotiating a new Concorde Agreement, the term used to describe the series of bilateral agreements between the company, the competing teams and the sport's regulator, the FIA, which set out the parameters of how the sport currently operates and is governed. A key component of the agreements are the rules governing how the prize fund paid to the competing teams is determined and allocated. Currently, the prize fund distributed to the teams is equivalent to around 70% of Formula One's pre-team share EBITDA. Once finalised, Moody's does not expect a renewed Concorde Agreement to result in a less favourable economic outcome for the company. Nevertheless there remains a degree of execution risk until a new agreement is signed.

Governance considerations, which Moody's take into account in assessing Formula One's credit quality, relate primarily to its financial policies. The company's target leverage is in the range of 5.0-5.5x net debt to company adjusted EBITDA. Moody's would expect surplus cash to be distributed by way of dividends and as EBITDA grows for the company to releverage back to its target level.

Formula One has recently announced its plans to become carbon neutral by 2030. The company aims to cut its emissions by between 20 and 50 per cent by 2030 through a range of actions which are likely to include running cars on biofuels, eliminating single-use plastic at events and reordering the race calendar to reduce distances between races. In the recently published regulations for 2021, the sport has announced its intention to retain the current 1.6-litre turbocharged hybrid engines for the time being.

LIQUIDITY

Formula One's liquidity profile is good. As of 30 September 2019, the company had $354 million of cash on balance sheet and access to an undrawn committed $500 million revolving credit facility available until 2024, under which there is ample headroom under its leverage covenant. There are no material debt maturities until 2024 and Moody's expects the company to remain solidly cash generative with Moody's-adjusted FCF/debt of around 10%.

STRUCTURAL CONSIDERATIONS

The senior secured facilities at Delta 2 (Lux) S.a.r.l. are rated B2 in line with the corporate family rating, given the pari passu capital structure following the full repayment of the second-lien term loan in July 2017.

OUTLOOK

The positive outlook assumes that the company will delever towards 6.0x on a Moody's-adjusted basis during 2020 through mid to high single digit percentage growth in revenue and EBITDA. The rating also assumes that negotiation of a renewed Concorde Agreement is satisfactorily concluded, covering the sport from 2021, on a broadly similar economic basis for the company. The outlook also assumes that there are no significant debt-financed acquisitions or distributions that would prevent the company from deleveraging in line with expectations.

WHAT COULD CHANGE THE RATING UP / DOWN

The rating could be upgraded if Moody's-adjusted debt/EBITDA falls sustainably below 6.0x, with Moody's-adjusted free cash flow/debt remaining in at least high-single digit percentages. An upgrade would also require the company to achieve further revenue and EBITDA growth and satisfactorily conclude the Concorde Agreement negotiations, whilst maintaining good liquidity.

The rating could be downgraded if Moody's-adjusted debt/EBITDA increases towards 7.0x, or if there are signs of weakening operating performance, cash flow generation or liquidity. In addition a downgrade could occur if a renewed Concorde Agreement is negotiated with materially adverse terms for the company, such as a higher total prize fund paid to the teams (when measured as a percentage of EBITDA before team payments).

OTHER CONSIDERATIONS

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.

COMPANY PROFILE

Alpha Topco Limited is the holding company for the group of companies that exploit the commercial rights to the FIA Formula One World Championship. In 2018, the companies owned by Alpha Topco Limited generated revenue of $1.8 billion. Alpha Topco — through its holding companies Delta Debtco Limited and Delta Topco Limited — is controlled by Liberty Media Corporation.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Martin Robert Hallmark
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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