Credit Opinion: IMG Worldwide, Inc.

Global Credit Research - 12 Aug 2013
New York, United States

Ratings
Category Moody's Rating

Outlook Corporate Family Rating Sr Sec Bank Credit Facility

Stable B2 Ba2/LGD2

Contacts
Analyst Phone

Scott Van den Bosch/New York City John Diaz/New York City

212.553.0193 212.553.1977

Opinion Rating Drivers
- High debt-to-EBITDA leverage - Event risk associated with potential sale of the company - Cyclical exposure to corporate advertising and marketing spend - Acquisitions and new business ventures create opportunity for revenue growth - Growing college sports business with good market positions in global sports and events management, and media production - Pending Stock Appreciation Rights (SAR) payments in 2013 and 2014 will impact liquidity

Corporate Profile
IMG Worldwide, Inc. ("IMG") is a sports, entertainment and media organization, with nearly 3,500 employees, and 156 offices in over 30 countries. IMG is a diversified global business owned by Forstmann Little, with three major business segments: IMG Sports & Entertainment, IMG College and IMG Media. The company distributes television and media rights, organizes sports, fashion and cultural events, and manages franchises. Annual revenues approximate $1.45 billion LTM through March 31, 2013.

SUMMARY RATING RATIONALE
IMG's B2 Corporate Family Rating (CFR) reflects the company's high leverage of 6.3x (including Moody's standard adjustments, and treating $104 million of estimated future SAR payments as debt), relatively modest EBITDA margins, and the impact of the SAR payments in 2013 and 2014 on its liquidity position. The company is also sensitive to cyclical corporate advertising and marketing spending, but should be able to limit some of this exposure through its more predictable assets including IMG's sports and entrainment events and its growing college business. IMG is owned by private equity firm Forstmann Little and the firm is looking at alternatives for its investment in the firm. A sale of the company that increases leverage could have a negative impact on the ratings, although the secured bank debt facility should be protected by a change of control provision in the credit agreement.

IMG's ratings are supported by revenue and EBITDA growth over the past several years, its strong brand and market position, a diversified revenue stream, and global presence. IMG should also benefit from growth in the college sports business which Moody's believes could be a reliable source of revenue going forward. Joint ventures in Brazil, India, and China have the potential to offer good growth opportunities to IMG over the mid to long term, but provide higher levels of risk as well.

DETAILED RATING CONSIDERATIONS
HIGH DEBT-TO-EBITDA LEVERAGE IMG's ratings continue to be constrained by its high debt-to-EBITDA leverage of 6.3x. IMG also suffers from modest EBITDA margins in the 12% range, although that is partly due to revenue received on behalf of some of its clients which decrease margins given they are passed through to the client. However, we expect leverage and EBITDA margins will improve over the rating horizon driven by further top line revenue and EBITDA growth. Moody's anticipates leverage will decline going forward due to EBITDA growth led by its college business and the payment of its SAR obligations in 2013 and 2014. Moody's expects its media division to see relatively flat EBITDA performance in 2013. The Sports & Entertainment division may benefit to a degree from the acquisition of Catalyst which it acquired at the end of 2012. As contracts for some of the events that IMG manages come up for renewal, the margins the company receives from these events could come under pressure. IMG could see growth from its international joint ventures in China due to its partnership with the soccer league in 2013. The India soccer and basketball leagues begin in 2014 and partnerships in Brazil and Turkey could lead to growth in future years. While these initiatives could result in increased earnings, success for some initiatives are far from certain and are likely to occur over the mid to long term. IMG has also made small acquisitions to develop and expand its data, consulting, and digital capabilities with the recent purchase of Enetpulse and Catalyst as well as signing a joint venture with Bloomberg sports. Included in the company's debt calculation which is reflected in the company's CFR, is subordinated debt located at IMG's holding company. This debt is held by funds managed by the company's owner, Forstmann Little, and provides cushion against potential loss for the Ba2-rated bank debt. However, this debt begins to mature on November 30, 2015 with annual installments of $133.333 million due in 2015, 2016, and 2017 which could be refinanced with higher interest rates than the current 4.5% interest rate if the company is not sold. IMG's interest expense could potentially increase as a result. The term loan facility maturity accelerates if the sub notes are not refinanced 93 days prior to maturity. GROWING COLLEGE SPORTS BUSINESS WITH GOOD MARKET POSITIONS IN GLOBAL SPORTS AND EVENTS MANAGEMENT AND MEDIA PRODUCTION IMG's global brand, including offices in more than 30 countries worldwide, provides the company with a strong market position within the sports and entertainment space. While some of the properties are owned, many of the events are managed and secured under exclusive multi-year contracts. Despite the company's strong market position, the nature of its sports and entertainment and clientele businesses often result in lower margins as the event or client become more successful. Moody's expects the company to continue to focus on developing businesses that it can hold an ownership stake in to benefit to a greater degree in its sports and entertainment ventures. This focus on ownership of assets is expected to offset the margin compression on some of its older business activities. Moody's expects IMG's college sport business will continue to see revenue growth over the rating horizon due to the sector's meaningful scale and diversity. The marketing of college football is a relatively under-penetrated area compared to professional sports and IMG has been successful over the last few years at leveraging its existing infrastructure to generate new revenue streams. IMG may also benefit from a new hire that may lead to additional sponsorship contracts going forward. Apart from organic growth, future growth may be aided by acquisitions and partnerships. IMG's ratings incorporate higher revenue and EBITDA generation capability associated with key sports and entertainment events and the additional opportunities to leverage its assets globally. In addition to the company's positive growth prospects in college football, we believe that IMG's other initiatives including joint ventures in Brazil, China, India and Turkey that are expected to increase activity in the near term and have the potential to offer meaningful growth to the company in the future, but are still high risk investments. It is also worth noting, the term loan does not have a pledge on the JV investments. While the outcome of these initiatives may not be known for several years, we derive comfort from the company's track record and its tendency to utilize minimal capital in its investments.

GOOD BUSINESS DIVERSIFICATION IMG operates within three operating segments including Sports and Entertainment (S&E), Media, and College. S&E consists of event ownership and management, client representation, fashion, consulting, licensing and training services. IMG's Media's segment is one of the largest independent producers and distributors of sports programming and entertainment programs worldwide. Within these two business segments, the company manages and operates numerous events or properties including Wimbledon, The British Open, Australian Open as well as others. IMG's College business has a strong presence in college football with representation relationships with premier sports colleges in most of the major markets and licensing relationships with numerous institutions. IMG has a diverse revenue stream with a large percentage of revenue coming from outside the U.S. with no single customer representing a significant percentage of total revenues. Its exposure to Europe could weigh on its results if economic conditions were to deteriorate.

Liquidity
Moody's expects IMG will have an adequate liquidity profile over the next twelve months. At March 31, 2013, the company had balance sheet cash of approximately $97 million. The cash balance is down from $197 million in March 31, 2012 due largely to a material decrease in is accounts payable balance in addition to some acquisition activity. IMG's $50 million revolver matures in 2015 and the $300 million Term Loan matures in 2016. We expect the company will pay $3 million of annual term loan amortization and make SAR payments of $65 million in 2013 and $39 million in 2014. The SAR payments may increase pressure to draw on its revolver. As mentioned previously, the company's $400 million of subordinated debt matures in annual installments of $133 million starting in November 2015. The company's credit facility also allows for an incremental facility of $75 million which can be used for general corporate purpose, equity buybacks, dividends, and to repay Holdco Subordinate debt. A $150 million debt acquisition basket is also included in the credit agreement. We expect IMG will remain in compliance with financial covenants over the next twelve months with sufficient EBITDA headroom given the large number of add backs allowed in covenant calculated EBITDA.

Structural Considerations
The Ba2 rating on the guaranteed senior secured credit facility is three notches above the CFR. The credit facility is secured by the capital stock of the borrower and its domestic subsidiaries, as well as their intellectual and personal property. However, it does not include security in client contracts, certain joint venture interests and related assets. These excluded assets represent the material revenue-generating assets of the company, though heavily influenced by the company's intellectual property. So essentially Moody's views the facility to be substantially unsecured debt with the benefit of limited security in certain intangible assets. The $400 million unrated subordinated notes are contractually subordinated to the credit facilities and provide a loss absorption cushion which provides lift for the senior debt rating above the CFR.

Rating Outlook
The stable outlook reflects our expectation that IMG's operating performance will continue to improve in 2013. EBITDA growth and the SARs payments, which are included in debt, are expected to combine to reduce leverage below 6x by the end of 2013. The SAR payments are expected to reduce its liquidity position compared to prior years although cash balances, free cash flow, revolver draws, or incremental term loans could be used to address these payments.

What Could Change the Rating - Up
The rating is constrained by the increased likelihood that the private equity sponsor will exit its investment in the near to midterm. Positive rating pressure could occur if leverage were to decline below 4x (using Moody's standard adjustments) on a sustained basis driven by strong and predictable EBITDA growth and confidence that management intends to maintain leverage below that level going forward.

What Could Change the Rating - Down
Sustained total leverage above 6.5x would put downward pressure on the ratings. Debt financed acquisitions or cash distributions to equity holders that increased leverage or impair its liquidity position could also put downward pressure on the ratings. In addition, an increase in the level of senior secured debt relative to subordinated debt in

the capital structure could put pressure on the Ba2 rating of the bank facility.

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