Nov 29 -
Summary analysis -- Live Nation Entertainment Inc. ---------------- 29-Nov-2012
CREDIT RATING: B+/Stable/-- Country: United States
State/Province: New York
Primary SIC: Amusement and
Mult. CUSIP6: 538034
Mult. CUSIP6: 784178
Credit Rating History:
Local currency Foreign currency
21-Apr-2010 B+/-- B+/--
04-Oct-2007 B/-- B/--
The corporate credit rating on Beverly Hills, Calif.-based Live Nation Entertainment Inc. reflects Standard & Poor’s Ratings Services’ expectation that leverage will remain relatively high, but that operating performance will continue to be somewhat stable, because of to the company’s degree of business diversity. We consider the company’s business profile “fair” (based on our criteria), based on its strong position in the live entertainment and ticketing businesses, notwithstanding the low EBITDA margin of the concert business and increasing ticketing competition. We view the company’s financial profile as “highly leveraged” because of its high debt to EBITDA and tightening covenants.
Live Nation manages artists, books them in its network of owned and operated venues, and sells concert tickets, concessions, and high-margin corporate sponsorships. Over one-half of overall EBITDA is from Ticketmaster, of which one-half is from concerts, 20% from sports, 15% from arts and theater, and 10% from family events. Ticketmaster has venue-ticketing contracts lasting from three to five years. Although contracts offer a degree of visibility, the company encounters pricing pressure on successive renewals. It also faces increasing competition from Anschutz Entertainment Group Inc. (AEG), the second-largest concert promoter in the U.S. AEG has formed a venture with Outbox Technology Inc., to sell tickets for AEG’s venues. Outbox will compete with Ticketmaster on future ticketing contracts. AEG’s technology allows venues to sell tickets through their own Web sites. We believe Ticketmaster’s historically high client retention rate may diminish slightly as contracts expire.
Under our base-case scenario, we expect low- to mid-single-digit percent revenue growth and an EBITDA increase in the mid- to high-single-digit percent area in 2013. We expect that, in this scenario, major artists will continue to increase touring, which is becoming a larger percentage of their earnings as CD sales decline. We expect the EBITDA margin will remain relatively low as the concert business will continue to represent the majority of revenues, but the margin should increase slightly over time because of continued growth in higher margin revenue streams.
Revenues rose 10% in the key three months ended Sept. 30, 2012, while EBITDA rose 2% as growth in higher-margin sponsorship and advertising, as well as ticketing revenues, was offset by expenses to upgrade the Ticketmaster platform. The EBITDA margin rose to a still low 7.8% for the 12 months ended Sept. 30, 2012, from 6.8% in the prior 12 months, benefiting from cost reductions.
We believe Live Nation can maintain lease-adjusted debt leverage in the high-4x area for full-year 2012 and in the mid-4x range in 2013. Lease-adjusted EBITDA coverage of interest expense should be in the high-2x area for the full year 2012 and slightly over 3x in 2013. Interest expense is declining as a result of the September 2012 refinancing of its $287 million 10.75% senior notes due 2016 with $225 million 7% senior notes due 2020 and $100 million of incremental term-loan B borrowings.
Lease-adjusted total debt to EBITDA declined to 5x for the 12 months ended Sept. 30, 2012, from 5.3x over the prior 12 months. Adjusted leverage is consistent with the indicative debt-to-EBITDA ratio range of 5x or higher, that characterizes a highly leveraged financial profile under our criteria. Lease-adjusted EBITDA coverage of interest expense increased to 2.8x for the 12 months ended Sept. 30, 2012, from 2.4x over the prior 12 months. Conversion of EBITDA into discretionary cash flow improved to 25% from 5% in the prior 12 months. The year ago period was negatively impacted by higher working capital needs. We expect that conversion of EBITDA to discretionary cash flow will be roughly 30% in 2012 and slightly higher than 30% in 2013.
Since 2010, Live Nation has been in a dispute with its former ticketing partner, CTS Eventim AG, which claims Live Nation breached its obligations under the 10-year ticketing agreement. The timing and ultimate resolution of this matter is uncertain, and an unfavorable outcome is not factored into the rating.
Live Nation has “adequate” liquidity to cover its needs in the near to intermediate term, even in the event of moderate unforeseen EBITDA declines. Our assessment of the company’s liquidity profile incorporates the following expectations and assumptions:
-- We expect sources to cover uses for the upcoming 12 to 24 months by at least 1.2x.
-- We expect net sources to be positive, even if EBITDA drops 20% over next 12 months.
-- Compliance with financial covenants would not survive a 15%-20% drop in EBITDA over the coming 12-18 months because of stepdowns, but we believe Live Nation can afford increased debt service costs associated with an amendment to its credit agreement, if its margin of compliance declines.
-- We believe Live Nation can absorb low-probability, high-impact shocks.
-- Live Nation has a generally satisfactory standing in the credit markets.
We believe discretionary cash flow, Live Nation’s revolving credit facility, and cash balances provide adequate liquidity. We expect discretionary cash flow to be $100 million for full-year 2012 and $120 million in 2013. Liquidity includes $54 million in outstanding letters of credit and $246 million of availability under the $300 million undrawn revolving credit facility. Cash balances were $784 million at Sept. 30, 2012, but only $300 million after subtracting ticketing and concert client cash received in advance of events. This should continue to provide sufficient funding of seasonal working capital needs and some excess liquidity. We expect that some of Live Nation’s excess cash will be used in acquisitions.
Near-term debt maturities of $34 million the fourth quarter of 2012 and $38 million in 2013 are minimal. On July 15, 2014, holders of the $220 million 2.875% convertible senior notes due 2027 have a put option. We currently expect Live Nation to refinance this potential obligation, should it receive notice that the put will be exercised.
According to the June 2012 amendment to its credit agreement, Live Nation’s step down in the leverage covenant of 4.5x was postponed; it now gradually steps down to 4.25x at March 31, 2014, 4.0x at March 31, 2015, and to 3.75x on March 31, 2016. Leverage (calculated by the bank agreement) remained flat, at around 3.75x at Sept. 30, 2012 compared with one year ago, maintaining a 17% EBITDA margin of compliance. We believe Live Nation can maintain an adequate margin of compliance with the step-downs through modest EBITDA growth and debt reduction.
Our stable rating outlook on Live Nation reflects our expectation that the concert business should grow modestly in 2013. We could consider upgrading Live Nation to ‘BB-’ over the intermediate term if the company resolves the CTS dispute favorably, demonstrates consistency in EBITDA and discretionary cash flow trends, adheres to a financial policy that facilitates adjusted leverage of less than 5x, and maintains an adequate margin of compliance with financial covenants. We could lower the rating to ‘B’ over the intermediate term if weaker operating performance causes fully adjusted debt leverage to rise above 6x and if the company’s margin of compliance falls below a 10% EBITDA cushion with no prospects for improvement on a sustained basis. Specifically, this could occur if the ultimate outcome of the CTS arbitration is unfavorable; if concert attendance declines in 2013, causing EBITDA to decline by roughly 7% and discretionary cash flow to narrow; or if competitive risks appear to be increasing.
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