UFC Holdings (UFC) is generating free cash flow, but the company behind the mixed martial arts (MMA) association is adding $150 million to a $2.3 billion loan, sparking concern about an increasing debt burden.
By bringing in another $150 million into the mix, UFC is boosting the loan coming due in 2026 to $2.45 billion while increasing the size of a credit revolver to $212.75 million from $162.75 million. The new borrowing will be used to pay down that credit facility. That amounts to rising debt, something ratings agencies are concerned about.
UFC’s B2 credit family rating (CFR) reflects already high leverage levels, which Moody’s expects will increase to over 8x by the end of 2020,” said Moody’s Investors Service in a note obtained by Casino.org. “In addition, cash flow from operations will decrease as long as the pandemic impacts the ability to hold live events with spectators in attendance. UFC resumed MMA events in May 2020, with additional fights scheduled in the near term.”
A B2 grade on the Moody’s scale is in junk territory, considered speculative and “subject to high credit risk.”
Curious Time for the Loan
UFC’s decision to add $150 million to its term loan arrives at a time when credit research firms are increasing scrutiny of the balance sheets of athletic leagues and gaming companies, among other industries.
The boosted borrowing also arrives after UFC Holdings in January approved a $300 million distribution to equity investors with $196 million paid out in the first quarter. That move drew the ire of UFC competitors, who claim the league doesn’t adequately compensate them.
Even with that large payout to investors and the rising leverage, data suggest UFC is generating cash. As of May 31, the league had $205 million in cash on hand, and even if the aforementioned $162.75 million credit facility is erased from that total, there’s still $83 million in free cash remaining.
“A governance consideration that Moody’s considers in UFC’s credit profile is the company’s highly aggressive financial policy,” said the research firm. “UFC has maintained very high leverage levels and issued additional debt, including $465 million of additional term loans, to help take out preferred equity in September 2019. UFC has also directed free cash flow to dividends and has authorized additional dividends going forward.”
Coronavirus-Related Issues
Much to the relief of sports-deprived bettors, UFC recently returned to action. But it’s not entirely clear of issues stemming from the coronavirus pandemic.
Sports Illustrated reports UFC will miss out on $100 million in revenue this year because it’s holding competitions without fans because of COVID-19. Still, that’s just a small slice of the $750 million the league will generate, assuming it can fulfill its deal with ESPN to deliver 42 events. Moody’s notes it’s unlikely the firm will upgrade UFC as long as events are held in empty arenas.
“An upgrade is unlikely as long as the coronavirus impacts the ability to hold live events with fans in attendance,” said the credit grader. “However, an upgrade could occur if leverage declined below 5x (including Moody’s adjustments) with continued positive revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) growth as well as a good liquidity profile.”
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