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