Endeavor, the massive Hollywood talent agency that owns UFC and Miss Universe, just got hit with a credit rating downgrade as the coronavirus shuts down sports events and media production
- Hollywood's largest talent agency had its debt downgraded on Monday, as its revenues have plummeted amid the coronavirus pandemic.
- S&P Global lowered Endeavor's credit rating to 'CCC+' from 'B,' noting social-distancing had likely taken a toll on revenue given its expansion into media production and live events, and it may not be able to support its debt burden.
- Endeavor has piled on debt in recent years amid an M&A spree that diversified its business away from solely representing talent, diving into live events like UFC and Professional Bull Riders.
- S&P warned that the company faced significant financial risk in the months ahead and that it could be motivated to "seek a distressed debt restructuring if coronavirus containment does not occur by midyear."
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Endeavor, Hollywood's largest talent agency and a rising player in live entertainment events, has seen revenues plummet amid the fallout of the coronavirus pandemic, leading S&P Global to downgrade its credit rating on Monday.
Private-equity giant Silver Lake is one of Endeavor's largest financial backers, plowing $750 million into the company over the past eight years. It holds a controlling stake in the company.
S&P lowered Endeavor's issuer rating to 'CCC+' from 'B', noting that social-distancing measures had likely taken a toll on the firm's revenues given its expansion into media production and live events, and it may not be able to support its hefty debt burden.
It also downgraded its rating on Endeavor subsidiary WME IMG Holdings LLC's first-lien credit facilities to 'CCC+' from 'B', and said that its 'B' issuer rating for UFC and 'B' rating on its first-lien debt remained on CreditWatch with negative implications.
"Endeavor entered 2020 with a highly leveraged capital structure, therefore the anticipated significant drop in revenue in 2020 could potentially result in an unsustainable capital structure," credit analyst Jing Li and Emile Courtney wrote in the report.
Further, the credit-ratings agency said the bleak outlook for the company's media production and events revenue streams "significantly heightened financial risk over at least the next several quarters," which the agency believes "could motivate the company to seek a distressed debt restructuring if coronavirus containment does not occur by midyear so that revenue can begin to recover."
Silver Lake and Endeavor did not immediately respond to requests to comment.
In recent weeks, Hollywood's largest agencies have turned to layoffs, furloughs, or salary cuts as government shutdowns and stay-at-home orders have frozen businesses across the country.
Endeavor, the largest entertainment talent agency with 7,000 staff across an array of businesses, has laid off 250 employees whose jobs can't be done remotely, and a planned equity award to partners in April has been shelved. Top execs Patrick Whitesell and Ari Emanuel have foregone salaries for the year, and they've rolled out broad staff pay cuts on a sliding scale.
The company, which pulled an initial public offering in September the day before it was set to debut, has been on an M&A spree in recent years as it diversified its business away from solely representing talent.
In 2016, it led a consortium of buyers that spent $4 billion buying mixed-martial arts league UFC, and it has also bought Professional Bull Riders, Miss Universe Pageant, and art events and media companies, among other transactions.
That has helped the company's revenues soar, but it has also saddled it with nearly $5 billion in debt.
By mid-2019, the company was on track for $4 billion in annual revenue - up from $1.3 billion in annual revenues five years earlier - but only a third of it from representation, according to documents filed with the Securities and Exchange Commission as part of the company's IPO effort. Nearly two-thirds was driven by entertainment and sports events like UFC and professional soccer media rights.
This expansion hasn't aged well amid the Covid-19 outbreak that has canceled and postponed myriad live events, and has also put Hollywood production on hold.
"That's a double-whammy that could be fatal. I think because of their leverage, that double-edged sword is going to cut them deeply," Lloyd Greif, a veteran Los Angeles investment banker and founder of boutique Greif & Co., told Business Insider.
S&P said the multi-front assault on Endeavor's businesses has presented "significant anticipated stress on revenue and cash flow."
"A sizable portion of Endeavor's revenue is event- and live entertainment-based or otherwise sensitive to the health of the leisure and entertainment economy, which is currently disproportionately hurt by restrictions on public gatherings," S&P wrote in the report. "Endeavor owns, operates, or represents a number of events and entertainment properties, including Professional Bull Riders, Fashion Week, Fortnite competitions, and several European soccer leagues."
Endeavor is scheduled to shell out $650 million in interest and principal payments on its debt in this year and next, according to company filings from last fall.
In mid-March, S&P put Endeavor and UFC on a negative credit watch, calling Endeavor "very highly leveraged."
It's not clear when the US economy will open back up again for business and facilitate group gatherings, but even in best-case scenarios Endeavor faces an uphill battle.
"Even when production restarts, which we currently assume would be in the next few months, it might not be sufficient to offset the impact from cancelled or postponed events," S&P wrote in the report.
