May 8, 2012 / 5:20 PM / 7 years ago

TEXT-S&P rates U.K. Formula One (Alpha Topco Ltd.) 'B+'

Overview	
     -- Formula One (Alpha Topco Ltd.), the U.K.-based group responsible for 	
the promotion of the Formula One World Championship (F1) and exploitation of 	
the sport's commercial rights, has refinanced its capital structure with a 	
view to make a permitted distribution of up to $1 billion to holding company 	
Delta Topco in the process.	
     -- We are assigning our 'B+' long-term corporate credit rating to Formula 	
One.	
     -- We are assigning our 'BB-' issue rating and '2' recovery rating to the 	
group's proposed senior secured term loans and revolving credit facility.	
     -- The stable outlook reflects our view that Formula One's adjusted gross 	
leverage is unlikely to meaningfully decrease over the next two to three years 	
and that it will maintain adequate liquidity during the period.	
	
Rating Action	
	
On May 8, 2012, Standard & Poor's Ratings Services assigned its 'B+' long-term 	
corporate credit rating to U.K.-based Formula One (Alpha Topco Ltd.), the 	
Formula One World Championship organizer and owner of the sport's commercial 	
rights. The outlook is stable.	
	
At the same time, we assigned our 'BB-' issue rating to the following proposed 	
senior secured loans issued by Delta 2 (Lux) s.a.r.l. and guaranteed by 	
Formula One:	
	
     -- $1,382.5 million amortizing term loan B due in April 2017; 	
     -- $817.5 million amortizing term loan C maturing in April 2018; and	
     -- $70 million revolving credit facility (RCF) maturing in April 2017.	
	
	
In addition, we assigned these senior debt issues a recovery rating of '2', 	
indicating our expectation of substantial (70%-90%) recovery in the event of a 	
payment default.	
	
Rationale	
	
The ratings reflect the successful completion of the group's refinancing at 	
the end of April 2012, under the same terms and conditions as the preliminary 	
documentation. As a result, the ratings are in line with the preliminary 	
ratings assigned on April 18, 2012.	
	
The long-term corporate credit rating on Formula One is mainly constrained by 	
our view of the group's financial risk profile as highly leveraged. As part of 	
the refinancing, $4 billion of shareholder loans are at holding company Delta 	
Topco level. We consider these to be debt-like obligations, under our 	
criteria, and we believe that the group is unlikely to deleverage 	
substantially over the next two to three years, despite a cash flow sweep 	
mechanism. We estimate that Standard & Poor's adjusted gross debt-to-EBITDA 	
ratio for Formula One should reach about 12x at year-end 2012, under the new 	
capital structure, and about 4.2x excluding the shareholder loans.	
	
These factors are partly mitigated by Formula One's business risk profile, 	
which we consider to be satisfactory. Underpinning our assessment is the 	
group's high contract backlog of over $7 billion, which provides some 	
visibility and stability to the proposed capital structure, as well as 	
interest coverage that is in line with the ratings and good free cash flow 	
generation. We anticipate adjusted EBITDA interest coverage to be at about 	
0.9x, or more than 3x excluding shareholder loans, over the next two to three 	
years.	
	
Further rating weaknesses include Formula One's continuous need to maintain 	
its high audience share, the existence of substitute entertainment events to 	
F1 races that compete for similar audiences, some exposure to economic 	
downturns, mostly at contract renewal times, and potential CEO succession 	
risks.	
	
On the positive side, Formula One's satisfactory business risk profile is 	
supported by: 	
	
     -- The significant revenue and earnings visibility and stability that its 	
contract backlog provides; 	
     -- The group's exclusive ownership of commercial rights to F1 motorsports 	
racing from the FIA for the next 98 years; The positioning of F1 motorsport 	
racing as one of the world's top sports in terms of popularity and audience 	
reach; 	
     -- The signing up of most of the 12 F1 racing teams, including nearly all 	
of the top teams, to the new Concorde agreement that runs until 2020 and sets 	
F1 ground rules and team financial incentives; 	
     -- Long-term growth prospects for the business; 	
     -- Solid profitability, although we expect a pronounced contraction of 	
five percentage points in group EBITDA margin to about 27% under the new 	
Concorde agreement, as of 2013; and 	
     -- A flexible cost base that protects margins to a degree if revenues 	
contract.	
	
Liquidity	
We view Formula One's liquidity as "adequate," under our criteria, based on 	
our assessment of the capital structure post refinancing.	
	
Our adequate assessment of Formula One's liquidity is supported by our view 	
that liquidity sources should exceed all liquidity uses by 2x over the next 24 	
months. In particular, the group's liquidity should benefit from:	
	
     -- Cash and cash equivalents of about $46 million post transaction.	
     -- An undrawn $70 million RCF with no clean down provision. 	
     -- About $370 million of cumulative free cash flows in 2012 and 2013, 	
thanks to low tax payments, very low capital requirements, and generally 	
positive working capital changes.	
     -- Modest mandatory debt amortizations of about $17 million in 2012 and 	
$22 million thereafter.	
     -- Expectations of adequate headroom under the financial covenants of the 	
proposed senior loan indentures over the next two to three years.	
	
Recovery analysis	
The issue rating on the $70 million senior secured RCF, the $1,382.5 million 	
term loan B, and $817.5 million term loan C is 'BB-'. The recovery rating on 	
this debt is '2', indicating Standard & Poor's expectation of substantial 	
(70%-90%) recovery for senior lenders in the event of a payment default.	
	
Our recovery and issue ratings are underpinned by our valuation of Formula One 	
as a going concern, based on a combination of its very high brand recognition, 	
the contracted nature of its revenues, its variable cost structure, and our 	
view of the relatively creditor friendly jurisdiction in the U.K. This is 	
tempered by Formula One's sensitivity to the global economy during contract 	
renewal periods and, specifically, the exclusion of the 100 year agreement 	
with FIA under which Formula One has the exclusive commercial rights to F1 and 	
the other commercial contracts from the security package. 	
	
We understand that if Formula One declared bankruptcy, the 100 year agreement 	
would cease and the rights would go back to the FIA. Under a liquidation 	
approach, the recovery prospects for the various debtholders would be 	
negligible.	
	
In order to determine recoveries, we simulate a default scenario. Our 	
simulated default scenario contemplates a sharp decline in EBITDA, which is 	
unlikely to occur over the next few years given our current view of Formula 	
One's business and debt structure. However, under our default scenario, a 	
decline of this magnitude would likely stem from a widespread loss of demand 	
for F1 motorsports racing and a prolonged economic downturn, leading to 	
substantially lower viewership and event attendance. This, in turn, would 	
likely result in unfavorable renewals of contracts in TV broadcasting, race 	
promotion, and advertising. This scenario would lead to a default in 2017, 	
when the RCF and the term loan B mature, with EBITDA declining to $325 million.	
	
Formula One is headquartered and registered in the U.K, which we see as the 	
group's center of main interests. We consider the U.K. to be a relatively 	
creditor-friendly jurisdiction with regard to insolvency proceedings.	
	
For more details, see "COMIs In EU Insolvency Proceedings And Their Bearing On 	
Standard & Poor's Recovery Ratings," published July 8, 2008, and "Debt 	
Recovery For Creditors And The Law Of Insolvency In The U.K.," published June 	
25, 2007, on RatingsDirect on the Global Credit Portal.	
	
Under these assumptions we calculate an enterprise value of $2.1 billion, 	
equivalent to 6.5x EBITDA, at the simulated point of default. 	
	
In order to determine recovery prospects, we then deduct $105 million of 	
priority liabilities, which mostly comprise enforcement costs. This leaves a 	
net enterprise value of about $2.0 billion available to debtholders. We expect 	
the senior secured debt to amount to $2.2 billion (including six months of 	
prepetition interest), which in turn would leave sufficient value for the 	
senior secured debtholders to achieve debt coverage of 70%-90%, translating 	
into a recovery rating of '2'.	
	
Outlook	
The stable outlook reflects our view that Formula One's gross adjusted debt to 	
EBITDA is unlikely to meaningfully reduce over the next two to three years 	
under our base-case scenario that assumes a slowing world macroeconomic 	
environment. In our base case we anticipate that Formula One will generate 	
revenues in the low to mid single digits and report EBITDA margin of about 27% 	
starting in 2013 under the new Concorde agreement.	
	
The stable outlook also incorporates our expectations that Formula One will 	
maintain its position as a top worldwide sports promoter and that its covenant 	
headroom will likely remain adequate over the next few years.	
	
We could lower the ratings if adjusted gross debt to EBITDA were to 	
significantly exceed 15x--or increase to about 5x excluding shareholder 	
loans--or if adjusted EBITDA interest cover were to fall below 0.9x--or about 	
2.5x when excluding the noncash interest element from the shareholder 	
loans--over the next few years. We could also lower the ratings if group 	
EBITDA margin were to contract to below 27% during the period, or if the group 	
were to initiate sizable acquisition activity.	
	
At this stage, a positive rating action over the next 12 to 24 months is 	
unlikely in our view, given our expectations of Formula One's limited debt 	
deleveraging during the period and the revenue growth assumptions we have 	
already factored into our base case.	
	
Related Criteria And Research	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity 	
Descriptors For Global Corporate Issuers, July 2, 2010	
     -- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, 	
April 4, 2006	
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 	
Issuers' Speculative-Grade Debt, Aug. 10, 2009	
	
	
Ratings List	
	
New Rating; CreditWatch/Outlook Action	
	
Formula One (Alpha Topco Ltd.)	
 Corporate Credit Rating                B+/Stable/--       	
	
Delta 2 (Lux) s.a.r.l.	
 	
Senior Secured	
  US$1.383 bil fltg rate B bank ln due  BB-                	
  04/28/2017*                            	
   Recovery Rating                      2                  	
  US$817.5 mil  bank ln due 04/30/2018* BB-                	
   Recovery Rating                      2                  	
  US$70 mil fltg rate RCF bank ln due   BB-                	
  04/28/2017*                            	
   Recovery Rating                      2                  	
	
*Guaranteed by Formula One (Alpha Topco Ltd.).	
	
	
	
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.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below