oWe forecast that Alpha Topco (F1) will report improved performance in FY2021 given a planned 23-race calendar, growing spectator attendance, strong contracted revenues, and progress to date against budget.
oOur base case is for F1's adjusted leverage to improve to 5.5x-6.0x in FY2021, while generating more than $150 million in free cash flows. Our forecasts still depend heavily on the group's ability to deliver its planned race schedule and an improving outlook for physical events as COVID-19 restrictions are eased over time.
oWe are therefore revising our outlook on F1 to stable from negative and affirming our issuer credit rating at 'B+'. We are also affirming our 'B+' issue ratings on the group's $2.9 billion term loan and $500 million RCF, with recovery expectations of '3' (60%).
oThe stable outlook reflects our forecast that, in 2021, F1's leverage will return to below 7x and the group will generate material free operating cash flows (FOCF) such that FOCF to debt approaches 10% in the medium term.
LONDON (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
F1 outperformed our FY2020 base-case forecast.
Our base case had included 15 races and minimal race promoter fees. This produced our forecast of around neutral EBITDA and up to minus $300 million in free cash flows for the year. F1 bettered our base case, staging 17 races by extending the season and rescheduling some races to new circuits. The group also retained some promoter fees or negotiated a partial fee reduction in some instances even where no spectators attended. Media rights, despite being reduced, underpinned core revenue generation during FY2020. It generated 59% of total revenue, up from only 39% in FY2019. This culminated in the group reporting S&P Global Ratings-adjusted EBITDA of $24 million and FOCF of minus $130 million. As a result, it preserved its liquidity and balance sheet. F1 has not added any new gross debt during the pandemic.
Our FY2021 forecast incorporates a full calendar of 23 races and substantially higher race promoter fees than 2020.
In 2020, F1 reported revenues of $1.15 billion, just more than half the $2.02 billion of 2019. In the group's three key revenue segments (for reference, based on reclassified reporting) this included:
oMedia Rights: $671 million, down from $795 million in 2019 (16% year-on-year decline)
oRace Promotion: $149 million, down from $644 million in 2019 (77% year-on-year decline)
oSponsorship: $209 million, down from $311 million (33% year-on-year decline)
We forecast revenue will recover to $2.0 billion-$2.1 billion in 2021 with the 23-race schedule. Apart from the full schedule, managed revenue increases and price rises in media rights and sponsorship will also boost revenues. F1 anticipates additional revenue uplift in FY2021, in particular from race promotions and sponsorship, compared to FY2019, through additional races, contract escalations, improved contract renewal terms, additional race sponsorship, and continued expansion of sponsor partners.
F1 has a high proportion of contracted revenues.
Its key revenue streams--media rights, promoter fees, and sponsorship--are underpinned by contractual relationships, which ordinarily mean recurring revenue visibility. The group tries to manage its contract renewals pipeline such that no given year is particularly exposed to material contract expiry. Large media rights contracts are typically negotiated on three- or five-year terms, with minimum race delivery requirements set typically at or below 16 races. Race promotor contracts vary depending on the event, with some promoters on very long dated contracts and others on shorter arrangements, which are rarely less than three-year contracts.
Like many leisure and media operators, F1 is still exposed to any worsening of the pandemic.
Despite the group's contractual positions, 2020 showed that a material disruptive event such as a pandemic can shake its revenue stability. Any worsening of the pandemic that led to a return of lockdowns and restrictions on movement would likely affect revenue generation, particularly from sponsorship and race promotion. That said, we believe the group would now have the logistical know-how to stage close to a full calendar of closed races if required to under more severe conditions in the future. In FY2021, we expect some races could still be in doubt, but note the group has already held 10 race events to date (11 on Aug. 1) and can reschedule events, leading, in our view, to a reasonable chance of it hosting its planned 23 races.
F1 continues to drive forward business initiatives
Despite the pandemic, F1 continued to drive change and development in the business. In FY2020, the group signed a renewed Concorde Agreement, which, among other things, governs the determination and allocation of the teams' prize fund. We think the renewed agreement achieved two economically important outcomes for F1. Firstly, it removed any fixed payments required to be made to the teams, increasing the group's cost base flexibility. Secondly, at certain higher levels of EBIT generation, F1 will keep proportionally more, assuming it can execute on ambitious growth plans. This year sees the group add Saudi Arabia to its calendar, with Miami added next season. Over time, increased penetration in the U.S. remains an opportunity via greater media rights and sponsorship revenue. This also comes off the back of the commercial success of the group's Netflix program, which has increased awareness, particularly in the US. Lastly, next season will see implementation of new technical regulations and new-look cars.
The stable outlook reflects our forecast that, in 2021, F1 leverage will return to below 7x and it will generate material FOCF such that FOCF to debt approaches 10% over the medium term.
We could lower our rating on F1 if the group underperformed our current base case forecast. This could occur if we believed adjusted leverage was likely to remain anchored above 7x and FOCF to debt was to fall well below 10% on a sustainable basis. For example, if material government restrictions were implemented to combat the pandemic, resulting in severe reductions to the race calendar, negative ratings pressure would build. Additionally, a material weakening in the group's liquidity, decreasing headroom under the minimum liquidity covenant, or increased probability of a specific default event such as purchase of the group's debt below par could result in us lowering the rating.
We do not envisage ratings upside until the group achieves credit metrics in line with pre-pandemic levels and re-establishes consistent financial performance. However, upside could build if the group committed to and demonstrated a track record of sustaining leverage below 5x combined with consistent and material FOCF generation comfortably above 10% FOCF to debt. This would need to be accompanied by strong business performance and adequate liquidity. Lastly, under our group rating approach, any ratings upside for F1 would require our assessment of the estimated group credit profile of controlling parent Liberty Media to be at least 'bb-'.
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | General: The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014
oCriteria | Corporates | Industrials: Key Credit Factors For The Leisure And Sports Industry, March 5, 2014
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
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