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. 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