Live Nation Entertainment, Inc. -- Moody's downgrades Live Nation's CFR to B2
Rating Action: Moody's downgrades Live Nation's CFR to B2
Global Credit Research - 18 Aug 2020
Approximately $5 billion of debt rated
Toronto, August 18, 2020 -- Moody's Investors Service (Moody's) downgraded Live Nation Entertainment, Inc.'s (Live Nation) corporate family rating (CFR) to B2 from Ba3, probability of default rating to B2-PD from Ba3-PD, senior secured credit facilities ratings to B1 from Ba2, senior secured notes rating to B1 from Ba2, and senior unsecured notes ratings to B3 from B1. Moody's also downgraded the company's speculative grade liquidity rating to SGL-2 from SGL-1. The outlook remains negative.
"The downgrade of the CFR reflects expectations that the coronavirus pandemic will drive continued deterioration in the company's financial results and credit metrics due to suspension of live events", said Peter Adu, Moody's Vice President and Senior Analyst. "The downgrade of the SGL rating captures the company's cash burn", Adu added.
Ratings Downgraded:
Corporate Family Rating, to B2 from Ba3
Probability of Default Rating, to B2-PD from Ba3-PD
Senior Secured Credit Facilities, to B1 (LGD3) from Ba2 (LGD2)
Senior Secured Notes, to B1 (LGD3) from Ba2 (LGD2)
Senior Unsecured Notes, to B3 (LGD5) from B1 (LGD4)
Speculative Grade Liquidity Rating, to SGL-2 from SGL-1
Outlook Action: Outlook, Remains Negative RATINGS RATIONALE
Live Nation's B2 CFR is constrained by: (1) the continued significant negative impact of the coronavirus pandemic on its revenue and profitability; (2) elevated leverage (adjusted Debt/EBITDA) and expectations that the metric will be sustained above 6x through the next 12 to 18 months (28x for LTM Q2/2020); and (3) event risks, such as new ticketing competitors and regulatory changes addressing the company's substantial market position or mandated consumer protection initiatives. The company's rating benefits from: (1) good liquidity, which provides flexibility to meet its obligations over the next 12 months; (2) good market position, enhanced by established relationships with performing artists together with platforms for concert promotions and ticketing; which create substantial entry barriers; and (3) good growth prospects post-pandemic especially in emerging markets, where rising middle class incomes will drive increased consumption of live events.
The rapid and widening spread of the coronavirus outbreak, weakened global economic outlook and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The live entertainment sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. Due to the spread of the virus, live events have been postponed or canceled. While Live Nation has gone through cyclical downturns over time, the impact of the pandemic on its profitability and cash flow is far worse than observed in previous cycles. Today's rating action reflects the impact on Live Nation of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
Live Nation's social risk is elevated. The coronavirus pandemic is expected to continue to impact operations in the live entertainment sector and in turn Live Nation's earnings and cash flow until a vaccine becomes available. Also, the company's market position attracts periodic adverse publicity related to both consumer protection and anti-competitive behavior. These lead to periodic calls for regulatory intervention and although the company has not been sanctioned, credit concerns exist.
Live Nation's governance risk is elevated as it has engaged in growth by acquisitions without a public leverage target.
Live Nation has good liquidity (SGL-2). Sources approximate $2.7 billion while Moody's estimates that negative free cash flow may be $1.5 billion in the 12 months to June 30, 2021, with minimal debt maturities. The company has stated that it expects to consume about $185 million per month on average through the end of 2020 [1], which Moody's anticipates may improve somewhat in mid-2021. Liquidity is supported by cash of about $1.7 billion (excluding $745 million in ticketing client cash and $717 million of net event-related deferred revenue), $565 million of availability under its $630 million multi-revolving credit facility that matures in October 2024 (none drawn but there is $65 million of letters of credit outstanding) and $400 million of delayed draw term loan that can be tapped for liquidity purposes. In July 2020, the company amended the net leverage covenant under its revolving credit facility. The covenant is not applicable until the fourth quarter of 2021 unless the company chooses to resume the testing earlier. Instead, a $500 million minimum liquidity test is applicable and compliance is not expected to be problematic through the next four quarters. Live Nation has limited ability to generate liquidity from asset sales.
The negative outlook reflects Live Nation's elevated leverage, cash burn and uncertainty as to when live events will return to normal and also signals that a rating downgrade may occur if the coronavirus pandemic is expected to significantly pressure demand for live events and the company's liquidity in mid-2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
For an upgrade to be considered, the company must demonstrate stable operating performance, eliminate its cash burn and maintain very good liquidity while sustaining Debt/EBITDA below 5.5x (28x for LTM Q2/2020) and FCF/Debt above 5% (-10% for LTM Q2/2020).
The ratings could be downgraded if suspension of live events continues in mid-2021, if liquidity becomes weak or if Debt/EBITDA is sustained above 6.5x (28x for LTM Q2/2020) and FCF/Debt below 0% (-10% for LTM Q2/2020).
Live Nation Entertainment, Inc., headquartered in Beverly Hills, California, operates a leading live entertainment ticketing and marketing company (Ticketmaster), and owns, operates and/or exclusively books venues and promotes live entertainment with operations in North America, Europe, Asia and South America. Revenue for the twelve months ended June 30, 2020 was $8.1 billion.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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REFERENCES/CITATIONS
[1] Form 10-Q (SEC), August 5, 2020
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Peter Adu, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Donald S. Carter, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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