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Rating Action:

Moody's downgrades SESAC's CFR to B3, affirms first-lien credit facilities at B2 and assigns Caa2 to new second-lien term loan; outlook stable

07 Apr 2015

Approximately $90 million of new debt rated

New York, April 07, 2015 -- Moody's Investors Service has assigned a Caa2 rating to SESAC Holdco II LLC 's ("SESAC" or the "company") new $90 million second-lien term loan. In connection with this rating action, Moody's downgraded SESAC's Corporate Family Rating (CFR) to B3 from B2, and affirmed the existing first-lien credit facilities at B2 (which includes the first-lien term loan that was upsized by $25 million to $367 million outstanding as part of this transaction and $15 million revolver) and Probability of Default Rating at B3-PD. The rating outlook is stable.

Net proceeds will be used to pay an estimated $110 million dividend to private equity sponsors, Rizvi Traverse controlled entities and minority shareowners. Given the insertion of second-lien debt in SESAC's capital structure, the first-lien credit facilities' rating was maintained at B2, despite the downgrade of the CFR by one notch, to reflect the loss absorption cushion provided by the new junior debt in a distressed scenario under Moody's Loss Given Default (LGD) Methodology. We also revised the expected mean family recovery rate to 50% from 65% due to the new dual-class bank debt in the capital structure, which is reflected in our affirmation of the PDR at B3-PD. SESAC will seek an amendment to the first-lien credit agreement to: (i) facilitate the dividend payment, which is currently restricted under the existing "available basket" and 4x leverage test; and (ii) readjust the facility's accordion feature following its depletion subsequent to the add-on tranche. The add-on is expected to mirror the terms, conditions and maturity of the existing first-lien term loan.

..Rating Downgraded:

Corporate Family Rating to B3 from B2

..Rating Assigned:

$90 Million Senior Secured Second-Lien Term Loan due 2021 -- Caa2 (LGD-6)

..Ratings Affirmed:

Probability of Default Rating -- B3-PD

$ 15 Million Senior Secured Revolving Credit Facility due 2018 -- B2 (LGD-3)

$367 Million (upsized by $25 Million; $350 Million as originally issued) Senior Secured First-Lien Term Loan due 2019 -- B2 (LGD-3)

The assigned rating is subject to review of final documentation and no material change in the size, terms and conditions of the transaction as advised to Moody's.

RATINGS RATIONALE

SESAC's CFR revision to B3 reflects the company's high pro forma financial leverage of 7.7x total debt to EBITDA (as of December 31, 2014, incorporating the new $115 million of incremental debt and Moody's standard adjustments), which positions the company weakly at the B3 level, and aggressive financial posture as a result of the proposed dividend recapitalization. The rating also captures the company's history of shareholder-friendly policies, including distributions and preferred share redemptions totaling over $285 million since fiscal year 2008 (includes the $110 million dividend contemplated with this transaction).

Moody's projects the company will de-lever to the mid-6x range by fiscal 2017 (ending March), which is consistent with the median leverage of 6.7x for B3 rated global industry peers. De-leveraging will be fueled by continued growth and high retention in the affiliate base and licensee network, which should support EBITDA expansion, and aided by the scheduled debt amortization and mandatory excess cash flow sweep on the first-lien term loan. The company's small scale relative to competitors is also factored in the B3 rating. SESAC generated LTM revenue of approximately $182 million through December 2014, representing a small percentage of the Performing Rights Organization (PRO) market (estimated at roughly 8% share), which is dominated by its much larger competitors, ASCAP and BMI. The potential for litigation associated with the current antitrust allegations against SESAC is also factored in the B3 CFR.

Ratings are supported by Moody's expectation for positive free cash flow generation, stable EBITDA margins and continued revenue and EBITDA growth. We believe this will be driven by SESAC's further share gains in an underpenetrated PRO market, growth in higher margin segments and negotiated price increases in existing contracts. Ratings are also supported by the stable contractual nature and diversification of its growing licensee contracts, with the five largest licensees accounting for just under 13% of total revenue, largest affiliate representing less than 6% of royalties paid, relatively high barriers to entry in the PRO space and favorable regulatory trends. The contractual nature of the business and high retention rates provide the company not only with a stable and predictable revenue stream, but also consistent annual rate increases and automatic renewals, which help drive year-over-year growth.

Rating Outlook

SESAC's stable rating outlook reflects Moody's expectation of continued top-line revenue and EBITDA growth in the mid-to-high single-digit range resulting in modest de-leveraging over the rating horizon. We project free cash flow to be in the range of $0-5 million (excluding the contemplated one-time dividend) and SESAC will de-lever to the mid-6x range by fiscal 2017 (ending March).

What Could Change the Rating - Down

Ratings could experience downward pressure if financial leverage is sustained above 8.0x (Moody's adjusted) or if EBITDA growth is insufficient to maintain positive free cash flow generation. Additional leveraging transactions or sizable distributions to shareholders could also result in a downgrade. To the extent any plaintiff is successful in the pending lawsuits against the company resulting in significant damages above the contemplated litigation escrows, Moody's could lower the rating.

What Could Change the Rating - Up

Given the company's high pro forma financial leverage of 7.7x (as of December 31, 2014, incorporating the incremental debt tranches and Moody's standard adjustments), SESAC is weakly positioned in the B3 rating category making an upgrade unlikely over the near-term. However, long-term Moody's would consider a rating upgrade if the company were to demonstrate prudent financial policies and meaningfully reduce leverage to the mid-5x range driven by our expectation of continued revenue and EBITDA expansion. We would also expect SESAC to demonstrate consistent positive free cash flow generation resulting in free cash flow to debt of at least 5%.

Moody's subscribers can find additional information in the SESAC credit opinion published on www.moodys.com.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. 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.

Headquartered in Nashville, Tennessee, SESAC is a full-service Performing Rights Organization (PRO) that represents over 30,000 songwriters, music publishers and other creators of music. The company is the smallest of the three PROs in the US and generates revenue from the public performances of their affiliates' music, by collecting licensing income from broadcasters and other users of music and distributing royalties to its affiliate base of songwriters, publishers and composers. In December 2012, Rizvi Traverse controlled entities acquired 75% of SESAC (minority equity owners and management hold the remaining 25%) in a LBO for roughly $591 million. Revenue for the twelve months ended December 31, 2014 totaled approximately $182 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 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.

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.

Gregory A. Fraser
Vice President - Senior Analyst
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 C 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 downgrades SESAC's CFR to B3, affirms first-lien credit facilities at B2 and assigns Caa2 to new second-lien term loan; outlook stable
No Related Data.
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