S&P Downgrades SFX Entertainment (SFXE) to 'CCC'; Liquidity, Cash Flow Primary Keys to Rating

August 27, 2015 2:32 PM EDT

Standard & Poor's Ratings Services said today that it lowered its corporate credit rating on SFX Entertainment Inc. (Nasdaq: SFXE) to 'CCC' from 'B-'. The rating outlook is negative.

At the same time, we lowered our issue-level rating on the company's senior secured second-lien loan to 'CCC' from 'B-' and revised the recovery rating to '4' from '3'. The '4' recovery rating indicates our expectation for average recovery (30%-50%; upper half of the range) of principal in the event of a payment default.

"SFX's liquidity and cash flow metrics remain the primary risk factors for the current rating, in our view," said Standard & Poor's credit analyst Naveen Sarma. The downgrade reflects the significant deterioration of SFX's financial flexibility and liquidity position following the recent cancelation of its announced "going private" transaction, our expectation that the company will generate negative as-reported EBITDA and free operating cash flow (FOCF)in 2015, and the subpar performance of its Beatport platform. "We believe the company will need additional cash or borrowing availability in order to meet its operating and working capital needs as well as to fund earnout payments," said Mr. Sarma.

We believe that SFX will likely face a liquidity crisis if its business conditions do not improve or if it does not have asset sales or a strategic alternative to the canceled "going private" agreement over the next 12 months. We also believe that SFX is likely to default over the next 12 months absent positive business performance or recapitalization developments.

The negative rating outlook on SFX reflects the company's "weak" liquidity, based on our criteria, the company's continued cash flow deficits, and the increasing likelihood of a payment default over the next 12 months. We believe that SFX's current capital structure and operating model are unsustainable.

We could lower the rating if SFX's operating cash flow remains negative without signs of significant improvement before the earnout payments and working capital needs due in the second half of 2015, causing a liquidity crisis. We would also lower the rating if we believe a restructuring or bankruptcy could occur within the next six months.

We would consider raising the rating one notch to 'CCC+' if we become convinced that the company will eliminate its cash flow deficits and that it has sufficient liquidity to fund its operations over the next 12-18 months.

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