Fitch Ratings has assigned
We have also assigned Delta 2 (Lux) S.a r.l.'s loans a senior secured instrument rating of 'BB+' with a Recovery Rating of 'RR2'.
The ratings follow Formula 1's successful refinancing of its
Formula 1's ratings reflect its highly cash-generative business model with strong revenue visibility supported by multi-year and mostly fixed-fee contracts. Capacity for further growth in the US and other regions is underpinned by the record popularity of the FIA Formula One World Championship (F1) with attendance and viewership levels growing strongly year on year. The ratings also reflect limited diversification and moderately high leverage.
The Stable Outlook reflects our expectation that funds from operation (FFO) leverage will fall within our 'BB' threshold in 2023 of below 4x. EBITDA growth in 2023 will be driven by an additional race in 2023 (
Key Rating Drivers
Lower Leverage Expected: We expect company-defined adjusted EBITDA to be a little under
Headroom Against Financial Policy: Given expected strong deleveraging, net leverage is likely to be well below parent
Unique Global Sport: F1 is one of the world's most watched sports globally. It is unique in its combination of high viewership, frequency of events and global event calendar format compared with the other major sports' competitions such as the
Macroeconomic Challenges: We expect inflation-related increases in operating expenses including personnel, logistics and Paddock club costs in 2022. We expect a slight decline in company-defined pre-team share (PTS) EBITDA as a percentage of revenue but overall company-defined adjusted EBITDA as a percentage of revenue to remain broadly stable, reflecting favourable changes to the Concorde agreement in 2021. Team payments are calculated on reported profits, which hedge against increases in operating expenses. The current popularity of the sport limits the risk of the weakened global macroeconomic environment materially dampening demand for sponsorship or other contract renewals.
Significant US Opportunity: Now in its fourth season, the Netflix documentary 'Drive to Survive' has boosted F1's popularity globally and particularly in the US. Tickets in
Revenue Pipeline Growing Quickly: A significant majority of the race promotion, broadcasting and sponsorship contracts specify payments in advance and have built-in annual increases in the fees payable. Contracts vary in length with broadcasters typically contracting for three to five years, while race promoter contracts are often longer as shown by
Limited Diversification: Revenues are directly exposed to the popularity of the sport, which is at record highs. Long-term contracts protect the company against declines in viewership or sponsor appeal though this would likely make renewals and revenue growth more challenging. We expect the
China Race Cancelled: Fitch-defined EBITDA fell nearly 80% in 2020, reflecting the disruption to the race calendar caused by the pandemic. The company returned to strong growth in 2021 as restrictions were eased and the race calendar returned to 22 races over the year. Under existing race promotion deals, 24 races were planned for 2023 including a return to
Derivation Summary
Formula 1's rating benefits from holding exclusive commercial rights to one of the most popular sports globally. Good revenue visibility, a flexible cost structure, strong brand recognition and F1's unique position in the global sports market supports the company's credit profile. The rating is constrained by the lack of meaningful product diversification, some concentration of customers in broadcasting and sponsorship and moderately high leverage, which we expect to decline with the projected growth in EBITDA.
Formula 1's operating profile as well as its main product are unique and given the lack of direct peers we benchmark it against a wide range of Fitch-rated media companies.
Higher-rated larger peers such as
Formula 1 compares well with the broader media peer group in 'B+' and below range, as the company demonstrated resilience during the pandemic with its flexible cost structure, ample liquidity and strong relationships with key partners and customers. Football rights management company Subcalidora 1 S.a.r.l (Mediapro; B/Stable) has a low rating, reflecting its customer concentration risk from a single contract for agency services with La Liga international.
Key Assumptions
Race calendars for 2022 and 2023 comprise 22 and 23 races, respectively. From 2024 the race calendar to increase to 24 races.
Revenue to grow 18.3% in 2022, 22.5% in 2023 and by low-single digits to 2025
Fitch-defined EBITDA margin of around 22.7% in 2022 and gradually improving to 23.5% by 2025
Capex at around 1.2% of revenue in 2022-2025, excluding any one-off capex related to the
Dividend payments are made to keep readily available cash on average at around
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Growth in EBITDA or a positive change in financial policy leading to FFO gross leverage sustainably below 3.0x (or gross debt at 2.8x Fitch-defined EBITDA)
FFO interest coverage sustainably above 5x (equivalent to Fitch-defined EBITDA interest cover of 5.5x)
Increase in average contract length with broadcasters, sponsors and promoters
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
FFO gross leverage sustainably above 4.0x (or gross debt above 3.8x Fitch-defined EBITDA)
Material decline in popularity of the sport driving a loss of (or significant reduction in terms at renewal) contracts with key broadcasters or sponsors leading to material pressure on revenues
Change in a future Concorde Agreement leading to a reduction in the proportion of PTS EBIT for Formula 1
FFO interest coverage expected to remain sustainably below 4.0x (equivalent to Fitch-defined EBITDA interest cover of 4.5x)
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Comfortable Liquidity: We view Formula 1's liquidity position as strong, as we expect its pre-dividend FCF margin to average 15% in the four years to 2025. Post refinancing its next significant debt maturities are in 2028 and 2030.
We expect the company to have strong headroom for its upcoming interest payments and amortisation payments on its term loan A. Formula 1 supports its liquidity with a
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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