-- 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.
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
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
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
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
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.
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.
For the complete recovery analysis, see Standard & Poor's recovery report on
NEP, to be published on RatingsDirect following this report.
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
NEP/NCP Holdco Inc.
Corporate Credit Rating B/Stable/--
$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
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