Fitch Ratings has assigned Delta Topco limited (Formula 1) a final Long-Term issuer Default Rating of 'BB' with a Stable Outlook.

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 USD2.9 billion term loans and USD500 million debt reduction.

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 (Las Vegas) along with favourable contract renewals.

Key Rating Drivers

Lower Leverage Expected: We expect company-defined adjusted EBITDA to be a little under USD600 million this year, allowing FFO gross leverage to fall to around 4.5x at end-2022 from 6.3x in 2021. Next year will see at least one additional race added to the calendar, more revenue under certain key contracts like the US media rights and three more F1 Sprint races bringing further marketable inventory. We believe this organic growth should lift company-defined adjusted EBITDA above USD700 million in 2023 and in the absence of a future increase in debt, FFO gross leverage should fall to within our 'BB' leverage threshold by end-2023.

Headroom Against Financial Policy: Given expected strong deleveraging, net leverage is likely to be well below parent Liberty Media's financial policy of net debt at below 5x company-defined adjusted EBITDA. We believe shareholder returns to Liberty Media seem likely given Formula 1's large cash balance and expected strong free cash flow (FCF) generation. Our leverage sensitivities are based on gross leverage so shareholder returns of excess cash flows should not reduce headroom in the current rating. Gross leverage could increase if the company issues new debt to fund additional shareholder returns though this is unlikely in the near future.

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 Olympics, NFL or the English Premier football league. This provides a strong fan base for pay-TV broadcasters, significant brand marketing opportunities for its sponsors, and makes hosting events attractive to cities and countries around the world. Under its long-term agreement with the Federation Internationale de l'Automobile (FIA), the company holds the exclusive commercial rights to the sport through to 2110.

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 Austin and Miami sold out in 2022 and the media rights contract extension with ESPN has been agreed at multiples of the previous fee. Increasing the size of the US market brings significant potential for promotion, sponsorship and media rights. In Las Vegas, the company will promote the race itself. This will be a major event for the sport next year, which we expect will help raise revenue above USD3 billion for the first time in 2023.

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 Australia's extension to 2037. Progress with long-term renewals of core revenue contracts has resulted in significant growth in future revenues under contract, which in total are multiples of 2022 equivalent fees.

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 Las Vegas race to be in high demand from fans, casinos and sponsors but as race promoter the company is more exposed to downside risks for this race than others. The company also has some exposure to customer concentration risk from its largest sponsors and broadcasters.

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 China in April as part of a two-year deal. It was recently announced that the 2023 China race has been cancelled, although the company continues to assess opportunities to replace the race and maintain a 24-race calendar. We believe, that even if that should not happen, the company should still have good capacity to reduce leverage below 4x in 2023 under a 23-race calendar.

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 Informa PLC (BBB-/Stable) or Pearson Plc (BBB-/Stable) have lower leverage and stronger product diversification. Similar to these companies, Formula 1 is exposed to secular shifts in media consumption and economic cycles via advertising revenues though its long-term contracts mitigate this.

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 Las Vegas race in 2023

Dividend payments are made to keep readily available cash on average at around USD500 million between 2022 and 2025

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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 USD500 million revolving credit facility and strong cash flow generation. At end-September 2022, USD1 billion of cash was held in the FWON tracker at parent company level, which could provide support to Formula 1, if required.

Date of Relevant Committee

08 November 2022

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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