Endeavor and CEO Ariel Emanuel face virus-driven challenges.

Endeavor and CEO Ariel Emanuel face virus-driven challenges. Photo by Joe Scarnici/Getty Images

Moody’s Investors Service downgraded its outlook for Beverly Hills-based WME IMG Holdings to negative from stable and lowered the company’s credit rating.

WME IMG is the talent agency subsidiary of Endeavor Group Holdings, also based in Beverly Hills.

The ratings agency cited Covid-19 and the effects of social distancing restrictions on WME IMG’s ability to stage live events and produce films and television shows, as well as the company’s debt load, for the moves.

The April 27 downgrade by Moody’s for the privately held unit came about two weeks after S&P Global Inc. dropped its ratings for both WME IMG and Endeavor to the middle of junk bond range and questioned the firm’s future viability.

WME announced May 7 that it would lay off or furlough roughly 20% of its work force. That follows Endeavor’s April 27 decision to cut about one-third of its staff.

“The downgrade of WME IMG’s ratings reflects the impact of the coronavirus outbreak, which has limited the ability to hold live events and complete media production as anticipated,” Moody’s analysts Scott Van den Bosch and Stephen Sohn wrote in their report.

“While some events will be rescheduled to future quarters, others will be canceled due to the pandemic. As a result, leverage levels will increase substantially, and liquidity will deteriorate for as long as live events continue to be impacted by the coronavirus,” they added.

S&P also cited the pandemic and the unit’s corporate debt load. WME IMG has highly leveraged its expansion, which has included acquiring an interest in the Ultimate Fighting Championship and purchasing the Miss Universe Organization.

Moody’s analysts further echoed that view. “WME IMG’s already high leverage level of approximately 7x as of Q3 2019 is projected to increase materially in the near term while liquidity will deteriorate as long as the coronavirus limits the ability to hold scheduled events,” they wrote.

Moody’s lowered its probability of default ratings to B3 from B2 for WME IMG, as well as for the unit’s first lien credit facility, including a senior secured revolver and term loan.

Moody said its B rating category designates its opinion that an investment is speculative and subject to high credit risk, with the lower the associated number, the higher the risk.

At the same time, the analysts were more optimistic about the company’s long-term prospects.

“Moody’s projects WME IMG will not incur material expenses for canceled events,” Van den Bosch and Sohn wrote. “While film production has been delayed, Moody’s expects production will be one of the earlier business segments to resume operations as the impact of the coronavirus abates.

“In the near term, WME IMG will be focused on cost savings and preserving liquidity,” they added. “Moody’s also expects that WME IMG will benefit from the increasing value of original content worldwide after the impact of the coronavirus subsides, as well as from revenue synergies as the organization utilizes existing relationships within television, film, sports, music, and advertising to grow the business.”

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