Endeavor Gets Credit Rating Lowered

It’s getting worse for Endeavor, a global entertainment company whose portfolio includes WME (talent agency), WME IMG (entertainment, sports and fashion), UFC (mixed martial arts promotion) and On Location Experiences (stadium and event hospitality).

A month ago I wrote that Endeavor and its mixed martial arts promotion subsidiary, UFC, might have their credit ratings lowered as a result of event cancellations due to the Coronavirus pandemic. This afternoon, S&P Global lowered its credit rating for Endeavor to “CCC+” from “B” with a negative outlook. S&P did the same for its subsidiary, also lowered the issue-level ratings on subsidiary WME IMG, but kept its rating for UFC at “B” with a negative outlook.

According to S&P, “Based on data and news reported since, we now see the impact on U.S. GDP will be far more severe than we once thought, with the contraction showing up in the first-quarter figure and worsening substantially in the April to June period. Federal guidelines in the U.S. for social distancing will remain in place at least until April 30, extending the possibility for a prolonged downturn for event and entertainment based businesses…We believe the level of financial risk could motivate the company to seek a distressed debt restructuring if coronavirus containment does not occur by midyear so that revenue can begin to recover.”

Just three days ago, UFC 249, scheduled to take place on April 18, was postponed after the organization was told to “stand down” by ESPN and parent company Disney.

Ari Emanuel, the CEO of Endeavor, built the company via a string of acquisitions from 2000 to 2020. By 2018 the buying spree, primarily from his acquisition of UFC in 2016, left privately held Endeavor saddled with $4.6 billion of debt stacked against just $3.6 billion in revenue. The game plan was to get rich and deleverage via an IPO in September, 2019.

But the IPO was for suckers and Emanuel pulled the plug on the public offering. Maybe he should have cut the price instead?

In late March, Endeavor significant announced layoffs. But the main problem for Endeavor is they built their global company largely with debt, and the Hollywood Reporter wrote shortly after, “The problem with taking on massive debt is that everything needs to go exactly right in order to eventually pay it down. Revenue needs to grow considerably and consistently, and expenses need to stay under control. While Endeavor can weather a small storm, it may prove all but impossible to weather a protracted coronavirus-fueled hurricane.”

Creditworthiness is how a lender determines that you will default on your debt obligations, or how worthy you are to receive new credit. Your creditworthiness is what creditors look at before they approve any new credit to you. Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest.