Last month both Moody’s Investor Services and S&P Global Ratings issued credit ratings for UFC Holdings, LLC (the rated entity following the acquisition of Zuffa in 2016 by Endeavor, Silver Lake Partners, and Kohlberg Kravis Roberts & Co.). With most of the UFC's finances kept away from the public's gaze, these reports offer a glimpse into the promotion’s current financial state. They also offer the opportunity to try and extrapolate further details about their financial status.
According to the Moody’s report “[r]evenues for 2018 were well over $600 million.” This would signify a decrease from the previous year, when the promotion was reported to have generated “well over $700 million” in 2017.
According to both Moody’s and S&P Global Ratings, the UFC is expected to increase the size of their senior secured 1st lien term loan from $1.442 billion to $1.877 billion, an increase of $435 million. This additional debt was to be used to pay off their $425 million 2nd lien term loan as well as to pay related transaction expenses. Furthermore, their undrawn revolving credit facility will be upsized from $150 million to $162.75 million.
While EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was not given in either report, we can make an estimate using the reported pro forma leverage. With the change in the loans, the ratio of debt to EBITDA apparently increased from 7.7x to 7.8x for the 4th quarter of last year. With $1.877 billion in debt, EBITDA for 2018 would therefore be approximately $240 million.
Moody’s also reported that they expected the UFC’s ratio of debt to EBITDA would fall by the end of 2019 to the mid 5x range. A ratio of 5.5x would translate to an EBITDA of around $340 million. The UFC’s was also projected to generate a free cash flow of almost 10% their debt in 2019, or nearly $190 million.
In comparison, Reuters reported an EBITDA of $192 million for 2015 and $226 million for 2016. While no EBITDA numbers have been reported yet for 2017, it is thought to have surpassed $275 million, allowing Endeavor to cash out on a $175 million contingent acquisition payment. Endeavor is eligible for another $75 million payment upon the achievement of a LTM (Last Twelve Months) EBITDA for the UFC of $350 million.
WME IMG LLC is also contracted to receive a $25 million management fee annually from the UFC.
According to the UFC in their lender’s presentation, the company was expected to see contractual revenue from US media, international media, licensing and sponsorship all increase by millions from 2017 to 2018, due to built-in annual escalators. The fact that even with the increase in contractual revenue as well as an estimated one million more pay-per-views sold, the UFC still generated around $100 million more in revenue in 2017 than it did in 2018. This strongly suggests that the Mayweather-McGregor fight was incredibly lucrative for the UFC. (A rough estimate would credit the Mayweather-McGregor boxing match with adding perhaps $150 million to the UFC’s revenue that year.)
Going forward, both reports see positives in their new relation with Disney owned ESPN. As Moody's explained:
"The US media agreement with ESPN replaces the existing agreement with Fox that ended in 2018 and is expected to lead to a material increase in revenue and EBITDA. UFC also recently entered into an agreement with ESPN for the domestic residential PPV rights for the next seven years and extended the media rights agreement out to seven years from five years. While the media rights deal is projected to lead to a material increase in revenue and EBITDA for the company, the PPV agreement is expected to dramatically reduce the volatility of the business."
According to S&P Global “UFC estimates that about 70% of its total 2019 pro forma revenue will be contractually fixed, which compares with less than 40% previously. This will mitigate the company’s business risks by replacing the volatile revenue from its event-driven PPV business model with a fixed-fee revenue stream.”
This less volatile, fixed-fee revenue streams likely played a part in helping the UFC secure their new loan add on. According to the Wall Street Journal the addition to the loan was “sold at 99.75 cents on the dollar, a small discount to where the existing debt traded. The company also paid existing loan holders a modest fee to allow the transaction.”
The floating interest rate on the junior loan had been at the London Interbank Offered Rate (LIBOR) plus 7.5%, which was 4.25% higher than the rate on the senior loan. Therefore interest payments on the $1.877 billion senior loan at current LIBOR would be around $113 million annually, a saving of roughly $16 million a year from their previous rate.
While most of these numbers were relatively rosy for the UFC, there was one note of caution fromMoody's, regarding the new ESPN deal.
"[A] potential long-term risk factor for UFC may be that the new agreement increases the cost of viewership for casual fans who do not currently subscribe to ESPN+. Viewers of PPV bouts would need to subscribe to ESPN+ going forward, compared to previously when they could purchase PPV bouts a la carte through a variety of cable subscriptions. The new agreement could reduce PPV purchases among some casual fans who do not convert into ESPN+ subscribers."
What this means is that even though the UFC has never had more debt, they've also never had a more consistent stream of revenue, one that was guaranteed for the next seven years.