TEXT-S&P rates NEP/NCP 'B', outlook stable

Wed Jan 9, 2013 4:24pm EST

Overview
     -- U.S. entertainment production equipment and services provider NEP/NCP 
Holdco Inc. plans to put in place new senior secured first- and second-lien 
facilities to refinance the loan that initially helped fund Crestview 
Partners' December 2012 leveraged acquisition of NEP Broadcasting LLC.
     -- We are assigning the company our 'B' corporate credit rating and the 
company's first-lien credit facilities our 'B' issue-level rating (with a '3' 
recovery rating). We are also assigning the new second-lien term loan our 
'CCC+' issue-level rating, with a recovery rating of '6'.
     -- We also withdrew our 'B' corporate credit ratings on ASP NEP/NCP 
Holdco Inc. and its operating subsidiary NEP II Inc.
     -- The stable rating outlook reflects our expectation that leverage will 
remain high, but that liquidity will be adequate over the near term.
 
Rating Action
On Jan. 9, 2013, Standard & Poor's Ratings Services assigned Pittsburgh-based 
NEP/NCP Holdco Inc. its 'B' corporate credit rating. The outlook is stable.

At the same time, we assigned NEP/NCP Holdco's first-lien credit facility our 
'B' issue-level rating, with a recovery rating of '3', indicating our 
expectation for meaningful (50% to 70%) recovery for lenders in the event of 
default. The first-lien credit facilities consist of a $60 million revolving 
credit facility due 2018 and a $455 million first-lien term loan facility due 
2020.

We also assigned NEP/NCP Holdco's $165 million second-lien term loan due 2020 
our 'CCC+' issue-level rating with a recovery rating of '6', indicating our 
expectation for negligible (0% to 10%) recovery for lenders in the event of 
default.

We also withdrew our 'B' corporate credit ratings on ASP NEP/NCP Holdco Inc. 
and its operating subsidiary NEP II Inc., which both no longer have 
outstanding debt. 

Rationale
The corporate credit rating on NEP/NCP Holdco Inc. (NEP) reflects our 
expectation that NEP's leverage will remain high, given the company's 
ownership by private-equity investors and its high capital intensity. We view 
NEP's business risk profile as "weak" (based on our criteria), given its 
narrow business focus, high customer concentration, potential volatility over 
the intermediate term stemming from possible contract gains and losses, and 
the somewhat unpredictable revenue trends of its Studios and Screenworks 
units. We view the markets in which NEP operates as relatively mature and 
expect low-single-digit percent organic revenue growth. We regard NEP's 
financial risk profile as "highly leveraged" (based on our criteria) because 
of its high debt burden, high capital expenditures, and likelihood of future 
acquisitions that will limit future deleveraging. We assess the company's 
management and governance as "fair," as we believe there are significant risks 
relating to its private-equity ownership.

NEP is a niche provider of outsourced production services for sporting events 
and entertainment. The company's mobile broadcast TV business in the U.S. 
generates nearly 60% of EBITDA, and the business derives roughly 80% of its 
revenue from long-term contracts and repeat customers. We view NEP's business 
risk profile as weak because of its narrow business focus and high customer 
concentration, with its top five customers accounting for almost 60% of sales. 
Competitive pressures can also affect operating performance. When broadcast or 
cable networks renew broadcasting rights for sporting events or when these 
rights change hands, NEP generally must renegotiate its long-term contracts 
with the rights holder. Although NEP's contract renewal record historically 
has been very high, the loss of a network client could significantly affect 
EBITDA. Furthermore, the company is vulnerable to potential labor actions in 
major sports leagues.

NEP's entertainment segment, accounting for 30% of EBITDA, is an independent 
provider of TV production studios in New York City and a supplier of large 
video screens for sporting events, concerts, and other live-audience events. 
NEP's Studios' utilization rates remain sensitive to the unpredictable 
popularity of live audience programming for which the company's studios are 
suited. Also, the video screen segment is exposed to the unpredictable nature 
of the concert touring business.

Under our base-case scenario for 2013 and 2014, we expect revenue and EBITDA 
to grow at a low- to mid-single-digit percent rate. We expect modest growth in 
most of the companies' business segments, and EBITDA margins to remain stable. 
For the year ended Dec. 31, 2012, estimated revenue and EBITDA increased 12% 
and 14%, respectively, as a result of 3% organic revenue growth and the 
contributions of four acquisitions. Estimated EBITDA margins rose to 34% in 
2012 from 33% in 2011, though they remain below the 35% level achieved in 2010 
and 38% in 2009 because of reduced margins in the U.S. mobile broadcast 
segment.

Pro forma for the transaction, we estimate that NEP's debt to EBITDA (adjusted 
for operating leases) was in the low-6x area as of Dec. 31, 2012. Leverage is 
above 5x, the level we associate with a highly leveraged financial risk 
profile. In addition, NEP has high capital spending needs to fund new 
contracts, and we believe there is a high likelihood that it will continue to 
make acquisitions, which may prevent meaningful deleveraging. Pro forma for 
the transaction, EBITDA coverage of interest was 2.3x in 2012. Our base-case 
scenario indicates that the company's leverage could decline to the high-5x 
area at year-end 2013 and the mid-5x area at year-end 2014, incorporating our 
expectation for moderate EBITDA growth. We expect EBITDA coverage of interest 
expense to rise to 2.5x in 2013.

Capital expenditures were high, at slightly over 50% of NEP's estimated EBITDA 
in 2012. We expect capital expenditures to decrease modestly in 2013 and 2014 
due to the high percentage of 2012 spending on the final standard definition 
to high definition upgrade investment. We expect NEP to convert 10% to 20% of 
EBITDA to discretionary cash flow in 2013 and 2014, a decrease from roughly 
one-third in 2012, because of higher interest expense.

Liquidity
NEP has "adequate" sources of liquidity (as defined in our criteria) to cover 
its needs over the next 12 months, in our view. Our liquidity assessment 
incorporates the following expectations:
     -- We expect that the company's sources will be sufficient to cover uses 
for the next 12 to 18 months by 1.2x or more.
     -- We expect net sources to be positive even with a 15% to 20% drop in 
EBITDA over the next 12 months.
     -- The company has the capacity to absorb high-impact, low-probability 
events over the next 12 months.
     -- We expect that the company would be able to maintain compliance with 
its new revolving credit facility covenants, even with a 15% decrease in 
EBITDA. The term loans do not have maintenance financial covenants.
     -- We believe the company currently has good relationships with its banks.
 
At close, we expect NEP would have about $2 million in cash and an undrawn $60 
million revolving credit facility. We expect the company to generate $10 
million to $15 million of discretionary cash flow in 2013, a decline from an 
estimated level of $30 million in 2012 due to higher interest expense. The 
company is initially subject to a 50% excess cash flow sweep, which steps down 
to 25% if total leverage is between 3x and 4x. We believe the company will use 
most of its discretionary cash flow for acquisitions to expand its range of 
services and its geographic footprint. Intermediate-term maturities are 
modest, limited to 1% annual amortization of the first-lien term loan, which 
we view as manageable with discretionary cash flow.

The new credit agreement includes a maximum first-lien leverage covenant of 
5.5x, which initially steps down to 5.25x on Dec. 31, 2013, and 5x on June 30, 
2014. It applies only when the company borrows 15% or more of the availability 
of its revolving credit facility. First-lien leverage, as defined in the 
credit agreement, was 3.9x at Dec. 31, 2012, providing roughly 30% headroom. 
We expect that the company will be able to maintain an adequate margin of 
compliance despite step-downs over the next few years.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
NEP, to be published on RatingsDirect following this report.

Outlook
Our rating outlook on NEP is stable. We could consider lowering the rating if 
operating performance weakens, causing leverage to rise above 7x, and/or the 
margin of covenant compliance approaches 15% or discretionary cash flow turns 
negative. This could occur as a result of a loss of a major contract; 
volatility in the company's studios business; or underperforming acquisitions 
that prevent the company from reducing leverage. 

Although less likely, we could raise the rating if NEP continues to improve 
operating results, generates more substantial and sustainable discretionary 
cash flow, maintains an appropriate cushion of compliance with its bank 
covenants, reduces leverage below 4x, and demonstrates a commitment to a less 
aggressive financial policy.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 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
New Rating

NEP/NCP Holdco Inc.
 Corporate Credit Rating                B/Stable/--        
 Senior Secured
  $165M 2nd-lien term loan due 2020     CCC+               
   Recovery Rating                      6                  
  $60M 1st-lien revolver due 2018       B                  
   Recovery Rating                      3                  
  $455M 1st-lien term loan due 2020     B                  
   Recovery Rating                      3                  

Ratings Withdrawn
                                       To              From
ASP NEP/NCP Holdco Inc.
 Corporate Credit Rating               NR              B/Stable/--

NEP II Inc.
 Corporate Credit Rating               NR              B/Stable/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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