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NEW YORK, April 6 (Reuters) - Mixed martial arts franchise Ultimate Fighting Championship (UFC) is returning to the loan market to raise US$100m of incremental debt to back a potential earnings-based payout tied to its 2016 buyout, sources said.
Proceeds from the new debt are slated to back a payment due to the sellers if certain financial targets are hit. The buyout included two future payments of US$175m and US$75m if the company hit specific milestones. The first payment may be due during the second half of 2017.
The new loan will be led by KKR Capital Markets, which took the lead financing role from Goldman Sachs in January when UFC went to the market to reprice the loan.
Goldman Sachs led the original first-lien loan to back the company’s 2016 buyout by private equity-backed talent agency WME-IMG. As reported, federal regulators warned the bank about the deal because of aggressive earnings before interest, tax, depreciation and amortization (Ebitda) add-backs included.
This allowed KKR to step into the lead role on the first-lien loan, as KKR is not subject to the federal leveraged lending guidance that Goldman Sachs is required to follow. The guidelines were put in place in an effort to limit highly leveraged loans considered risky.
Deutsche Bank led a US$425m second-lien loan backing the original buyout. This debt was not repriced.
"This is certainly an example of UFC being aggressive (again) with their add-backs," said an investor who has looked at the deal. "I had heard the company got some push-back from regulators, so I am mildly surprised to see them back so soon."
Total net leverage at UFC will stand at 5.8 times following the additional debt raise with first-lien net leverage at 4.5 times, according to an investor presentation.
S&P affirmed its B+ rating on the first-lien debt Thursday, as well as the CCC+ rating on the second-lien loan. S&P has the company on negative outlook due to the significant leverage, which the ratings agency puts above 8 times.
Management Ebitda for 2016 climbed to US$226m from US$192m in 2015, according to the presentation. However, the investor noted that the company is marketing the deal using adjusted Ebitda of US$320m “without providing much detail on the bridge between the numbers.”
The company notes that it achieved US$10m of cost savings in 2016 from reducing labor, marketing and third-party cost and is on schedule to generate US$55m of cost savings this year.
Despite concerns from regulators, investors have been eager to own the loan, which was trading at approximately 101, according to Thomson Reuters LPC data.
The add-on loan is expected to price with the same terms as the existing first-lien loan, which puts the spread at 325bp over Libor with a 1% floor. The loan originally priced at 400bp over Libor in August 2016. The commitment deadline for lenders is Thursday after launching on Wednesday.
KKR declined to comment. (Reporting by Jonathan Schwarzberg; Editing By Lynn Adler and Jon Methven)