Moody’s Investors Service and S&P Global Ratings both reported last week that UFC Holding’s, LLC was looking to add on another $150 million to their current 1st lien Term Loan. The net proceeds for this add on would be used to pay off their outstanding revolver balance.
The add-on would increase their current term loan to approximately $2.45 billion, while also upsizing the revolver from $162.75 to $212.75 million.
Moody’s gave the loan, due in 2026, a B2 rating, judging it as “being speculative and a high credit risk.”
While Moody’s warns that the UFC’s high debt-to-EBITDA ratio (also known as leverage) levels will increase this year, as “cash flow from operations will decrease as long as the pandemic impacts the ability to hold live events with spectators in attendance,” it also notes that the UFC contracted deals shields them from some of the risks:
“UFC benefits from its long term media and pay per view (PPV) rights agreement with ESPN which provides for a substantial portion of total revenue and EBITDA. This contractual arrangement will limit the impact of the pandemic as long as events can be held, even if there are no fans in attendance.”
In January of this year, the board of directors for UFC Holdings LLC authorized $300 in distributions to equity holders with $196 million having been paid out the first quarter of 2020.
Even with the distributions, as of May 31, 2020 the UFC had approximately $205 million cash on their balance sheet. They had ended 2019 with $151 million in cash balance. This suggests that even if the full $162.75 million revolver had been drawn in the first quarter, the UFC was able to generate a cash flow of at least $83 million in the first 5 months of the year. Moody’s expects excess cash flow to be used for dividends, which the UFC has already authorized going forward.
It was previously reported that the UFC’s leverage in 2019 was 6.7x. With approximately $2.3 billion in debt, we can estimate their EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) as around $350 million.
The UFC did well enough in the first quarter of 2020, that their leverage decreased to 6.4x. A rough, back-of-the-envelope calculation suggests that the UFC saw an increase in $35 million to EBITDA that quarter. One can’t help but assume that UFC 246: McGregor vs Cerrone played a big part in this increase.
With the decrease in revenues this year due to the pandemic, Moody’s projects their leverage with rise to 8x, or an estimated $305 million in EBITDA after including the $150 million loan add-on to their debt.
Moody’s projects that UFC leverage will likely decline to below 7x next year thanks to “contractual media increases and a gradual recovery in attendance revenue.”
While both Dana White and Joe Rogan can argue that there is currently no money available to pay fighters more, the projected leverage numbers don’t seem to support that.
The interest on the UFC’s loan was reported by Reuters last year as “325bp over Libor, with a 1% Libor floor.” With Libor currently below 1%, that would make their interest rates 4.25%, or $104 million a year for the full $2.45 billion in debt. And with 1% amortization on the loan, their total annual debt service (interest plus amortization) would be less than half their expected EBITDA for 2020. This would leave enough to effectively double fighters’ 2019 pay — as long as that money hasn't already been earmarked for other purposes by the UFC.