Rating Action:Moody's assigns Ba3 rating to Zuffa's (Ba3 CFR) new bank debt; rating outlook changed to stableGlobal Credit Research - 07 Feb 2013New York, February 07, 2013 -- Moody's Investors Service assigned a Ba3 (LGD4, 51%) rating to Zuffa, LLC's (Zuffa) (Ba3 Corporate Family Rating) new senior secured credit facility, comprising a $60 million 5-year revolving facility and a $450 million 7-year Term Loan B. Net proceeds will be used to refinance its existing debt, including a $463 million senior secured Term Loan B due 2015 (rated Ba3) and $50 million revolver maturing in 2015. Moody's also changed Zuffa's rating outlook to stable from positive due to higher than expected volatility in the company's revenue and profits, as well as higher leverage. The company's Ba3 CFR and Ba3-PD PDR (Probability of Default Rating) remain unchanged.In Moody's view, the company's cash flow volatility is due to the reliance on a few number of sporting events per period and the consequent vulnerability to the underperformance or cancellation of any single event.
The cancellation of one of the ten planned pay-per-view (PPV) events in North America in 2012 led to material EBITDA underperformance for Zuffa, despite the significantly higher television broadcast rights fees garnered in the year. While the company has made important strides in the diversification of its revenue sources and increase in contractual revenue, particularly through its multi-year television licensing deal with Fox in 2011, over half of its revenue is still derived from PPV events. In addition, Zuffa's PPV events have experienced declining buys per event at the same time the company has increased the number of live broadcast and cable television events. We believe that increased television programming may continue to dampen growth in PPV revenue in the coming years. .As a result of the unexpected challenges in 2012, the company's debt-to-EBITDA leverage (including Moody's standard adjustments) increased to 4.6x at year end 2012 from 3.3x in 2011, instead of declining to under 3.0x as was expected earlier in the year. This volatility in credit metrics constrains the company's ratings to the Ba3 category, despite its substantial growth opportunities in international markets and contracted increases in television rights fees well into the intermediate term. In the absence of further unanticipated challenges, we expect Zuffa to de-lever steadily over time to under 3.0x based on solely EBITDA growth. However, we believe that management is likely to utilize the incremental debt capacity under its current rating to invest in acquisitions or other growth opportunities, or increase distributions to its owners as it has done in the past, and maintain leverage above 2.5x.The following is a summary of today's rating actions: