TEXT - S&P rates Speedway Motorsports
Overview -- U.S.-based speedway operator Speedway Motorsports Inc. (SMI) plans to issue a $100 million add-on to its existing $150 million 6.75% notes due 2019. The company will use proceeds to repay the outstanding balance on the company's existing term loan due 2015. -- The company also plans to enter into a new $100 million revolving credit facility and a $250 million delayed draw term loan, both due 2018. The company will use the term loan proceeds to help repay the $275 million 8.75% notes due 2016, when they become callable in June 2013. -- We are placing the ratings on the company's 6.75% senior notes and 8.75% senior notes on CreditWatch with negative implications. We are also rating the company's new credit facility 'BBB-', with a recovery rating of '1'. -- The stable rating outlook reflects our view that a high proportion of contractually increasing and recurring revenues from broadcasting can sufficiently offset the potential for a slow recovery in admissions revenue and support credit measures consistent with our 'BB' rating. Rating Action On Jan. 8, 2013, we placed our issue-level ratings on U.S.-based Speedway Motorsports' 6.75% and 8.75% senior notes on CreditWatch with negative implications. Upon closing of the 6.75% senior notes add-on and the new credit facilities, we expect to revise our recovery rating on the senior notes to '5' (10% to 30% recovery expectation) from '3' (50% to 70% expectation). In addition, we expect to lower our issue-level rating on the senior notes to 'BB-' from 'BB', in accordance with our notching criteria. Proceeds from the $100 million senior notes add-on will be used to repay the outstanding $100 million term loan. Additionally, we are assigning the company's new $350 million credit facility (consisting of a $100 million revolver and $250 million delayed draw term loan, both due 2018) our 'BBB-' issue-level rating, with a recovery rating of '1', indicating our expectation for very high (90% to 100%) recovery in the event of a payment default. The company will use the term loan proceeds to help fund the redemption of the $275 million 8.75% senior notes due 2016 when they become callable in June 2013. The net increase in the term loan results in a higher level of secured debt outstanding under our simulated default scenario versus our previous analysis. This reduces the recovery prospects for the senior notes enough to warrant a negative revision to our recovery rating on the senior notes. Our ratings on the 8.75% senior notes will be withdrawn when the issue is redeemed. Rationale The corporate credit rating on Charlotte, N.C.-based Speedway Motorsports (SMI) reflects Standard & Poor's Ratings Services' assessment of the company's business risk profile as "fair" and our assessment of the company's financial risk profile as "significant," according to our criteria. Our assessment of SMI's business risk profile as fair reflects its reliance on an event-driven business model, the susceptibility of much of its revenue base to the economic cycle, and the existence of substitute entertainment events. Partially offsetting these risks are the company's strong EBITDA margins, good market position in the motorsports industry, and high barriers to entry stemming from significant capital costs for new racetracks and a limited supply of high-margin NASCAR racing dates. Additionally, SMI's business risk profile benefits from good revenue visibility from contracted NASCAR broadcasting revenue. While the existing contract is set to expire in 2014, in October 2012, Fox agreed to increase its aggregate payment to NASCAR by approximately 36% for a new 2015-2022 contract that includes broadcasting rights to the first 13 Sprint Cup races of the season. However, NASCAR viewership can be volatile and was down about 10% in 2012, and Fox represents only one portion of the annual NASCAR television rights. NASCAR's contract with current partners ESPN and Turner also ends after the 2014 season, and there is yet no indication that those networks will negotiate similar payment increases. Our assessment of SMI's financial risk profile as significant reflects leverage that we expect to remain in the mid-3x area through 2014, interest coverage of over 5x after giving effect to the interest savings associated with the proposed refinancing, and positive free operating cash flow. If the remainder of the 2015-2022 NASCAR seasons are negotiated at least as favorably as the Fox contract, and admissions revenues stabilize, we would expect associated EBITDA improvement to lead to sustainably lower leverage and possibly a higher financial risk assessment. Through September 2012, contracted NASCAR broadcasting revenue which represented about 40% of revenue for the period, was up about 4%, but ticket price discounting in order to spur attendance continued to drag on revenues , resulting in an overall decline of about 2%, in line with our full-year forecast for a low-single-digit percentage revenue decrease in 2012. Given SMI's relatively high fixed costs, margins have remained under pressure. EBITDA was down about 9% year to date September 2012, moderately higher than our prior expectations for a mid-single-digit decline in 2012. We now expect a low-double-digit percent decline in EBITDA for 2012. For 2013 and 2014, the existing NASCAR broadcasting contract will provide a stable source of cash flow, increasing on average by 3% per year through 2014. We expect that SMI will continue to discount ticket prices until the economic situation of its fans improves and that the built-in broadcasting revenue increases can sufficiently offset the potential for a slow recovery in admissions revenue. As a result, for 2013 and 2014 we have assumed a low-single-digit percentage growth in revenues and EBITDA. Liquidity We are revising our liquidity descriptor for SMI to "adequate" from "less than adequate," based on our expectation that financial covenants in SMI's new credit agreement will be set with at least a 15% cushion relative to thresholds. Our assessment of SMI's liquidity profile incorporates the following expectations and assumptions: -- Based on our current performance expectations, we expect SMI's sources of liquidity to exceed its uses by over 1.2x. We believe sources would exceed uses, even if forecasted EBITDA declines by more than 15%. -- Sources of liquidity should exceed uses by over 1.5x over the next 12 to 18 months, and should do so even if EBITDA declines by 30%. Pro forma for the refinancing, cash sources will include approximately $90 million of cash and about $60 million of availability under the new $100 million revolver. We expect operating cash flow to be about $100 million over each of the next two years, which should be sufficient to fund capital expenditures of $30 million, required amortization of the term loan, modest share repurchases, and the existing dividend. The first debt maturity is 2018, when the new revolver and term loan expire. Recovery analysis Please see our full recovery report, to be published as soon as possible after this press release. Outlook The stable rating outlook reflects our view that a high proportion of contractually increasing and recurring revenues from broadcasting through 2013 and 2014 can sufficiently offset a slow recovery in admissions revenue and support credit measures consistent with our 'BB' rating. We could lower our rating if admissions revenue declines substantially (likely from worsening economic conditions), or if 2013 viewership is weak as it was in 2012, possibly signaling a secular shift of interest away from NASCAR events. Such scenarios could weaken NASCAR's negotiating position with broadcasters for what remains of the 2015-2022 seasons. Based on our assessment of SMI's business risk profile as fair, a higher rating would be contingent upon our expectation that leverage could be sustained below 3x, a scenario we view as possible if the remaining broadcast negotiations are favorable to the track operators. Our consideration of a higher rating would also be contingent on stabilization of attendance revenues. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Unchanged Speedway Motorsports Inc. Corporate Credit Rating BB/Stable/-- New Rating Speedway Motorsports Inc. Speedway Funding LLC Senior Secured $250M delayed draw term loan due 2018 BBB- Recovery Rating 1 $100M revolver due 2018 BBB- Recovery Rating 1 Ratings Affirmed; CreditWatch Placement To From Speedway Motorsports Inc. Senior Unsecured $275M 8.75% sr nts due 2016 BB/Watch Neg BB Recovery Rating* 3 3 $250M 6.75% sr nts due 2019 BB/Watch Neg BB Recovery Rating* 3 3 *Standard & Poor's does not place its recovery ratings on CreditWatch; however, this does not preclude our recovery assessment from potentially changing in the future.