Creative Artists Agency has been downgraded in the junk bond range by two credit ratings agencies, with each saying the pandemic has highlighted CAA’s high debt level.
S&P Global Ratings Inc. lowered both its issuer credit rating and its issue-level rating on CAA’s first-lien term loan facility to B from B-plus. S&P’s recovery rating on the term loan remained unchanged at 3.
Similarly, Moody’s Investor Services downgraded CAA’s company rating, its probability of default, a $1.15 billion senior secured term loan and a $125 million senior secured revolving credit facility to B3 from B2. Moody’s also assigned a B3 rating to CAA’s recently proposed $75 million first lien term loan ticket.
Despite the downgrades, both rating services maintained their “stable” outlook for the talent agency and said they do not see a liquidity problem.
“CAA’s credit profile reflects the impact of the coronavirus outbreak on the ability to hold live events and complete media production as scheduled, as well as the overall economy, which will lead to lower discretionary consumer spending,” wrote S&P analysts Dylan Singh and Jawad Hussain.
According to Moody’s analysts Scott Van den Bosch and Stephen Sohn, “Major studios have indefinitely suspended the production of almost all TV and film projects. The outbreak has also led to the cancellation or postponement of multiple live events, including sports, music concerts and festivals. The majority of CAA’s represented talent are being directly affected by these disruptions because they are not receiving compensation. This, in turn, prevents CAA from collecting its agent commissions, which leads us to anticipate that its credit metrics will be materially weaker than we previously expected in the fiscal year 2020.”
Both sets of analysts pointed out that music accounts for a relatively modest amount of CAA’s revenue. They also said they expect TV and streaming production to recover comparatively quickly post-pandemic.
“CAA is well positioned to benefit from the increasing investment in content from over-the-top players such as Netflix, Amazon, Disney, Warner Media and others,” the S&P analysts wrote. “In addition, we don’t believe the current effects of the pandemic on TV and film production will materially change our expectations for content growth, particularly in the OTT space.
“We currently forecast that film and TV production activity will gradually recover in the second half of 2020 before returning to pre-pandemic levels in the first half of 2021,” they added.
CAA also has substantial income from long-term contracts, primarily from program packaging, the Moody’s analysts said.
“Weaknesses in CAA’s credit profile have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and CAA remains vulnerable to the outbreak continuing to spread,” Moody’s Van den Bosch and Sohn said.
“CAA has issued additional debt on several occasions during the past few years including almost $400 million of additional debt to buy back employee equity in November 2019,” they added.
