September 10, 2019 / 5:03 PM / 3 months ago

Investors weigh in on UFC’s US$465m return to the ring

NEW YORK, Sept 10 (LPC) - Mixed martial arts (MMA) promotion company Ultimate Fighting Championship (UFC) has launched a new US$465m leveraged loan, as the franchise benefits from an improved media rights agreement with pay TV sports channel ESPN that secures greater revenue, people familiar with the matter said.

UFC is adding the US$465m loan to an existing US$1.875bn term loan B that matures in 2026. That loan was trading over par in the US secondary market in August, which encouraged UFC to raise the new add-on loan.

“It’s an opportunistic trade for the UFC. Their loan has traded very close to either side of par and the momentum from the new media deal was very well received,” a portfolio manager said.

UFC’s parent company, Hollywood talent agency Endeavor Operating Company (formerly WME-IMG), bought UFC for US$4bn in 2016.

Endeavor filed documents in March to go public before the end of the year and is backed by private equity group Silver Lake and investors Canada Pension Plan Investment Board, Singaporean sovereign wealth fund GIC and Japanese technology group SoftBank.

Goldman Sachs, KKR, JP Morgan, Morgan Stanley and Deutsche Bank are underwriting Endeavor’s IPO.

UFC signed an expanded media rights deal in March 2019 with Disney-owned sports television giant ESPN, after inking the initial media rights deal in May 2018.

The agreement gives UFC more secure cash flow and has improved investors’ view of the company, which is also seeking to expand in the Middle East after signing a new multi-year deal with the Abu Dhabi government in September.

“After the ESPN deal, the ties to Disney, UFC is back in the good graces of investors,” a second portfolio manager said.

The expanded media rights deal with ESPN includes pay-per-view events for UFC and extends the agreement to seven years from five years. UFC will also get fixed media rights fees, in exchange for distributing its events through ESPN and the video streaming ESPN+ subscription service in the US, according to a report from S&P Global Ratings.

“This agreement will partially mitigate key business risks, such as the unforeseen need to cancel or postpone events,” S&P said in its report.

The updated media rights agreement will give UFC roughly 70% of contractually-fixed pro forma revenue this year, up from an earlier forecast of 40%.

BACK IN THE OCTAGON

Goldman Sachs is leading UFC’s US$465m B2/B rated add-on loan and is offering investors the same terms as the existing debt – 325bp over Libor, with a 1% Libor floor, and a discount of 99.5-99.75 cents, banking sources said.

Goldman also led and placed another US$435m add-on loan in April that extended the company’s term loan to 2026 from 2023, but it has not always been plain sailing in the US loan market for UFC and the investment bank.

Goldman led a leveraged loan in 2016 to fund UFC’s buyout by WME-IMG, but the deal attracted the attention of federal regulators, who warned over the aggressive Ebitda add-backs included in the loan at that time.

A year later in April 2017, UFC mandated KKR Capital Markets to lead a US$100m add-on loan, as the private equity-backed arranger was not subject to the same leveraged lending guidance as investment bank Goldman.

The relaxation of the leveraged lending guidance under the Trump administration has allowed Goldman to resume its lead left role with UFC on the current deal, however, despite the company’s adjusted debt to Ebitda having increased.

S&P said that UFC’s adjusted debt to Ebitda ratio is now “in the high 6x area”, compared to 5.8 times in April 2017, according to a UFC investor presentation.

Parent company Endeavor is also highly leveraged with long-term debt of US$4.53bn and total liabilities of US$7bn, according to its prospectus.

S&P expects UFC’s leverage to decrease to mid 6.0 times by next year, and the improved media rights contract is likely to significantly increase revenue and Ebitda margins.

Investors are expected to support the deal, and commitments for the new add-on loan are due on September 13.

Endeavor and Goldman Sachs were not immediately available for comment. (Edited by Tessa Walsh.) ))

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