S&P: Vivid Seats LLC 'B' Rating Affirmed On Dividend Recapitalization; Outlook Stable; Debt Ratings Assigned
OREANDA-NEWS. S&P Global Ratings said today that it affirmed its 'B' corporate credit rating to Chicago-based secondary ticket marketplace Vivid Seats LLC. The rating outlook is stable. At the same time, we assigned our 'B+' issue-level rating and '2' recovery rating to Vivid Seats $30 million first-lien senior secured revolving credit facility and $400 million first-lien senior secured term loan. The '2' recovery rating indicates our expectation for substantial recovery (70%-90%; upper half of the range) of principal in the event of a payment default. We also assigned our 'CCC+' issue-level rating and '6' recovery rating to the company's proposed $155 million second-lien senior secured term loan due 2023. We will withdraw our ratings on the company's existing first-lien debt following the debt repayment. On Sept. 9, 2016, Vivid Seats announced that it's seeking to raise $585 million of new senior secured credit facilities, and it will use the proceeds, along with cash on balance sheet, to refinance its existing first-lien debt and senior notes, and distribute a special dividend to the financial sponsor. On Jan. 12, 2016, U. S. private equity firm Vista Equity Partners Management LLC had announced a strategic partnership with Vivid Seats. Vivid Seats had issued new debt to fund the strategic investment. The 'B' corporate credit rating reflects our view that Vivid Seats will continue to have a highly leveraged financial risk profile, with adjusted debt leverage remaining above 6x over the next 12-18 months. Pro forma for the transaction, the company's adjusted debt to EBITDA ratio would be 6.5x as of June 30, 2016, if the current debt issues are repaid and excluding acquisition-related costs. We expect that leverage will remain in the high-6x area in 2016 and in the mid-5x area in 2017 as the company continues to generate healthy EBITDA. We view Vivid Seats' business risk profile as weak. Our assessment is based on the competitive secondary ticket market; Vivid Seat's relatively weak brand awareness, despite the low brand loyalty featured in this market; and the company's lack of distinctive or differentiating products versus its main competitors. However, Vivid Seats benefits from strong relationships with professional ticket brokers, and it has been able to gain market shares from competitors while maintaining an EBITDA margin in the low-20% rate--in line with its closest peers. Our assessment also reflects the company's minimal international presence, limited diversity of products, and smaller scale relative to industry leader Stubhub. Primary ticket outlets such as Ticketmaster (a Live Nation Entertainment Inc. company) contract directly with venues and promoters to sell event tickets on their behalf. The secondary market is a key distribution channel for the overall ticketing industry. Buyers often use secondary exchanges to access in-demand tickets that otherwise would have been sold out, and teams, venues, and performers use the secondary channel to offload inventory, reduce risk of unsold inventory, and generate cash flows. Approximately 24% of event tickets are sold through secondary channels. Key market risks, such as restriction on ticket resale and variable pricing by primary ticket sellers, could reduce sales volumes and compress fees, thus pressuring the secondary ticket market longer term. However, we believe the secondary ticket market will continue its solid growth during the next 12 months, notably due to the increased prevalence of mobile ticketing transactions. As one of the largest players in the secondary ticket market, Vivid Seats is well positioned to grow with the market and gain additional shares from players with suboptimal scale. The company's financial policy will likely be aggressive going forward, in our view. Our base-case scenario assumes the following:U. S. GDP growth of 2.0% in 2016 and 2.4% in 2017;Real personal consumption expenditure growth of 3% in 2016 and 2.8% in 2017;Revenue growth of about 40% for 2016 and in the high-single-digit percentage area in 2017, driven by low-double-digit percentage growth in the company's core marketplace segment;Stable EBITDA margin in the low-20% rate in 2016 and 2017; andAdjusted debt to EBITDA above 6x in 2017. The combination of a weak business risk profile assessment and a highly leveraged financial risk profile assessment has two possible initial analytical outcomes ("anchors") under our criteria: 'b' or 'b-'. We selected the 'b' anchor, based on our view that Vivid Seats has better cash flow measures than its peers in the 'B' rating category. The stable rating outlook reflects our expectation that Vivid Seats will enjoy good operating performance with double-digit revenue growth in 2017, while maintaining adequate liquidity. However, we believe that adjusted debt leverage will likely remain above 5x over the next two years due to the company's financial sponsor ownership. We could lower our corporate credit rating on Vivid Seats if poor operating performance or unfavorable financial policy actions cause the company's EBITDA interest coverage to decrease below 2x or its discretionary cash flow to debt to decline to the low-single digits. This could occur if revenue growth declines by 3% and gross margin decreases to below 70% in 2016 and 2017. Additionally, we could lower the rating if the company's business risk profile assessment weakens due to a significant increase in competitive pressure (likely from a new competitor), market share losses, or lower-than-expected return on marketing investments. We could raise the rating if the company reduces leverage to below 5x on a sustained basis and commits to a less aggressive financial policy. We believe this is less likely, given the company's private equity ownership.