Endeavor Credit Rating Downgraded by S&P With Company at ‘Substantial Risk’

“The negative outlook on Endeavor reflects a high level of uncertainty surrounding event- and entertainment-based revenue stream,” analysts wrote

Ari Emanuel
Photo credit: Emma McIntyre/Getty Images

S&P Global on Monday downgraded its credit rating for Endeavor to from B to CCC+ , which takes the company from “highly speculative” to “substantial risk.”

Endeavor has been in a precarious state since being forced to pull its planned initial public offering last September. The management and entertainment company’s financial situation has worsened amid the novel coronavirus pandemic, which has forced the cancelations of concerts, live events and Hollywood productions industry-wide.

S&P analysts also changed Endeavor’s credit outlook to negative.

“A sizable portion of Endeavor’s revenue is event- and live entertainment-based or otherwise sensitive to the health of the leisure and entertainment economy, which is currently disproportionately hurt by restrictions on public gatherings,” S&P analysts wrote in a report on Monday. “The negative outlook on Endeavor reflects a high level of uncertainty surrounding event- and entertainment-based revenue streams due to the spread of the coronavirus, resulting in significantly heightened financial risk over at least the next several quarters.

“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,” they continued.

Endeavor’s been weighed down by a massive amount of debt incurred mainly from its $2.3 billion acquisition of media, sports and fashion giant IMG, and its stunning $4 billion acquisition of the Ultimate Fighting Championship.

When Endeavor opened its books in September as part of its IPO, it revealed $4.6 billion in long-term debt and overall liabilities totaling $7.2 billion.

“Endeavor entered 2020 with a highly leveraged capital structure, therefore the anticipated significant drop in revenue in 2020 could potentially result in an unsustainable capital structure,” S&P analysts wrote. “Even when production restarts, which we currently assume would be in the next few months, it might not be sufficient to offset the impact from cancelled or postponed events. In addition, the recessions currently underway in the U.S. and Europe are likely to put additional pressure on Endeavor’s revenue model, which partly relies on corporate sponsorships, advertising spending, and consumption.”

S&P also lowered the issue-level ratings on subsidiary WME IMG Holdings LLC’s first-lien credit facilities from B to CCC+, but maintained a B rating on Endeavor’s Ultimate Fighting Championship, which is on credit watch with negative implications.

Endeavor, like many other companies struggling through the impact of the pandemic, has already been forced to make company-wide pay reductions of up to 30% to all staffers as a means of avoiding additional layoffs.

The company had already temporarily laid off 250 employees who were unable to work from home, and Endeavor’s chiefs Emanuel and Whitesell had already informed staff that they would each be going without a salary for the remainder of the year.

“We could lower the ratings on Endeavor if liquidity deteriorated, resulting in additional pressure on the company’s ability to meet debt service in the coming quarters and increasing the likelihood of a distressed debt restructuring,” analysts wrote. “We could also lower ratings if the ratio of liquidity sources to uses were below 1x and we lose confidence in the possibility of external liquidity support. Such a scenario could occur if efforts to contain the coronavirus did not develop in the manner we currently assume or recessions in the U.S. and Europe had a more material impact on financial risk than under our base case forecast.”