The S&P Global credit rating firm on Wednesday downgraded its rating for Live Nation Entertainment to “B+” from “BB-,” illustrating a change from simply non-investment grade speculative to highly speculative.
S&P also slapped the concert and live events company with a negative outlook as a result of the ongoing novel coronavirus pandemic and resulting shutdowns.
“The negative outlook reflects Live Nation’s exposure to postponed and canceled events during the COVID-19 pandemic and uncertainty surrounding the ensuing economic recovery and timing of the resumption of events,” S&P analysts wrote on Wednesday. “We highlight that the company’s future cash flow is exposed to changes in consumer behavior surrounding ticket refunds during this coronavirus outbreak.”
As of right now, people have been automatically refunded for canceled events and ticketholders have been given the option to request refunds for postponed and rescheduled shows. That, after Live Nation was recently sued for failing to refund customers for canceled shows and sporting events.
To date, a sizable majority of ticketholders for postponed and rescheduled events have opted to retain their tickets for use at a future date, S&P analysts said. However, if more consumers request refunds, it could increase cash outflows over the next 12 months, according to analysts.
Though some municipalities have begun to start the processes of reopening businesses, it’s still unclear how long it will be until major gatherings and events like concerts and sporting events will be able to resume operations. What’s more, it’s even more uncertain how consumer behaviors will change.
“The company’s revenue declines will be dramatic and challenge Live Nation to realign its cost structure during this period of minimal concert activity. As a result, we believe the company is aggressively managing its variable cost structure,” S&P analysts wrote. “Specifically, the company has announced a number of cost actions to mitigate losses in profitability including variable cost management of its concert platform, rent re-negotiations, cuts to executive compensation, and staff furloughs.
“Even with these cost and cash management initiatives, we believe the company’s EBITDA and free cash flow generation will be substantially negative in 2020,” they continued.
Live Nation reported earnings for the first quarter, ending March 31, last week in which revenue was down 21% compared with the same period a year ago. The company also suffered an adjusted operating loss of $20.5 million after reporting a $115.4 million profit in last year’s first quarter.
“Live Nation’s proposed issuance of $800 million in senior secured notes will provide additional liquidity as the company manages negative [earnings before interest, taxes, depreciation and amortization] and cash flow throughout 2020,” A&P analysts wrote. “While the notes represent a substantial increase in the company’s funded debt, we do not believe the notes will materially affect our view of the company’s financial risk because the transaction proceeds will be used for general corporate purposes and the respective cash balance will be netted against debt in our credit ratios.”
Last month, Saudi Arabia’s Public Investment Fund poured nearly $500 million into Live Nation, buying more than 12.3 million shares of the Los Angeles-based entertainment company — giving it a 5.7% stake in the company, according to a filing with the Securities and Exchange Commission.
“We could lower the rating if we believe that live music event postponements and cancelations will increase due to a prolonged coronavirus pandemic causing revenues to remain minimal,” analysts wrote. “We could also lower the rating if the company is unable to successfully manage its costs and cash flows, including an unfavorable acceleration of cash refunds for postponed live events and corresponding reductions in cash balances.”