Mansplaining the UFC Debt Warning
UFC made headlines in the financial news world yesterday, and not in a good way. Bloomberg reported that the United States Federal Reserve admonished Goldman Sachs over WME-IMG's purchase of UFC.
The story was circulated by the usual cadre of anti-UFC folks in the MMA world, but that doesn't mean that it's benign.
Let's go through exactly how the UFC sale went down and what the Fed was complaining about.
Some time ago, UFC's former owners, Zuffa, LLC (led by the Fertitta brothers) approached Goldman Sachs about brokering a sale.
Approaching a bank about brokering a sale is standard operating procedure when the seller wants to go on the open market in order to attract debt-driven buyers. The idea is that Zuffa didn't want to limit themselves to selling to only people/companies who have billions of dollars of cash on hand. Zuffa wanted to be able to sell to people/companies to are willing to take on billions of dollars in debt, and then pay Zuffa with the money gathered from taking on that debt.
Goldman Sachs, being the bank that is brokering the sale, was then tasked with putting together a picture of UFC's finances so that people/businesses investing in UFC would have an idea of how likely it is that UFC's new owners (who ended up being WME-IMG) would end up paying back the debt without declaring bankruptcy or otherwise defaulting on the debt.
When Goldman Sachs put together a picture of UFC's finances, it also served as a way to inform potential buyers of UFC how strong UFC is as an organization, and therefore how much UFC is worth.
So, Goldman Sachs spent months putting together a picture of UFC's finances. Then Goldman Sachs distributed that picture of UFC's finances to both potential buyers of UFC and to potential buyers of the debt that UFC's eventual buyer (WME-IMG, as it turned out) would end up taking on.
Here's where the Fed comes in.
After the housing bubble burst in the late-00's, everyone started to panic about debt. Congress then passed a law (commonly called "Dodd-Frank", after the Senator and Representative who sponsored the bill that became law) that gave the United States Federal Reserve increased oversight over large banks (like Goldman Sachs) and the debt deals that they facilitate. The law forces banks to send financial pictures for companies that are planning debt-driven sales (like UFC) to the Federal Reserve so that the Federal Reserve can prevent big banks and certain other large entities in the financial world from taking on too much "risky" debt.
There is a reason that "risky" is in quotes. All debt is risky. There is never a full guarantee that a loan will be paid back. That's why my mom, a very sweet mom who loves me dearly, admonishes me every time I offer a zero-interest loan to a friend. My mom knows that there is no guarantee that I will be paid back, and so my mom believes that there should be some kind of "interest" arrangement to make the loan fair to me. I always respond to my mom that I will always be broke, and so if a friend stiffs me at least a friend got my money and not my local overpriced artisan breakfast spot that charges $6 for two eggs, sunny side up.
Anywhoo, the Fed admonished Goldman Sachs because the Fed felt that Goldman Sachs painted too rosy a picture of UFC's finances.
And the Fed is correct! Correct, at least, that Goldman Sachs painted a very rosy picture of UFC's finances. Anyone who reads the Wrestling Observer every week has an idea of how strong UFC's finances have been over the years, and there is no question that Goldman Sachs' projections of the new UFC owners' ability to cut costs and increase revenues were more optimistic than just about any close follower of UFC's business would have projected.
But here's the problem (and the reason for my less-than-succinct mansplaining of this issue): UFC's debt sold like hotcakes!
After WME-IMG agreed to pay ~$2.6 billion for UFC (with an enterprise value [meaning the value of 100% of the company] of ~$4 billion), Goldman Sachs facilitated a loan to cover $1.8 billion of that purchase.
Goldman Sachs then offered that $1.8 billion in debt to investors. So, large scale investors had the opportunity to "buy" pieces of WME-IMG's $1.8 billion in debt, then receive debt payments (including interest) on a regular schedule.
Goldman Sachs had no problem whatsoever selling that $1.8 billion in debt. In fact, Bloomberg (the same news agency that reported the Fed's warning to Goldman Sachs yesterday) reported that the first $500 million in debt received $2 billion worth of bids! Goldman Sachs was actually able to lower the interest rate that WME-IMG ended up having to pay on their debt because so many large scale investors trusted that WME-IMG will be able to make payments on that first $500 million of UFC sale debt.
So, the Fed is saying "Goldman Sachs made UFC's risky debt look less risky than it really is".
Investors said, "Screw that! UFC's debt looks like it has such little risk that we're willing to take lower interest payments."
Keep in mind, investors had the EXACT SAME INFORMATION that the Fed has. It's not like Goldman Sachs duped investors and hid information that only the Fed has access to. Investors saw that UFC's projected revenue is way higher than their recent actual revenue has been. Investors saw that UFC's current costs are higher than UFC's projected costs after cost-cutting. Investors had Goldman Sachs' report on UFC's finances for months and still were rabidly trying to buy up WME-IMG's debt.
If you're asking, "if investors are rabidly buying the debt and WME-IMG is happy with the interest they're paying on the debt, then why does the Fed care?" GOOD QUESTION. Welcome to the club of countless people who follow the financial industry and wonder why the heck Dodd-Frank inserts the Fed in private financial transactions where both buyer and seller are happy to make the transaction.
Bottom line is, Bloomberg's report on the Fed warning was little more than red meat for anti-UFC folks and anti- Dodd-Frank folks. (And the red meat obviously worked on me!) Anti-UFC folks get to Tweet out a link to a report that contains the words "Fed" "warning" "debt" and "UFC" in it, and folks like me get to mansplain our objections to Dodd-Frank to an unsuspecting audience of MMA fans who just want to enjoy UFC 204 this weekend. (Enjoy!)
The story was circulated by the usual cadre of anti-UFC folks in the MMA world, but that doesn't mean that it's benign.
Let's go through exactly how the UFC sale went down and what the Fed was complaining about.
Some time ago, UFC's former owners, Zuffa, LLC (led by the Fertitta brothers) approached Goldman Sachs about brokering a sale.
Approaching a bank about brokering a sale is standard operating procedure when the seller wants to go on the open market in order to attract debt-driven buyers. The idea is that Zuffa didn't want to limit themselves to selling to only people/companies who have billions of dollars of cash on hand. Zuffa wanted to be able to sell to people/companies to are willing to take on billions of dollars in debt, and then pay Zuffa with the money gathered from taking on that debt.
Goldman Sachs, being the bank that is brokering the sale, was then tasked with putting together a picture of UFC's finances so that people/businesses investing in UFC would have an idea of how likely it is that UFC's new owners (who ended up being WME-IMG) would end up paying back the debt without declaring bankruptcy or otherwise defaulting on the debt.
When Goldman Sachs put together a picture of UFC's finances, it also served as a way to inform potential buyers of UFC how strong UFC is as an organization, and therefore how much UFC is worth.
So, Goldman Sachs spent months putting together a picture of UFC's finances. Then Goldman Sachs distributed that picture of UFC's finances to both potential buyers of UFC and to potential buyers of the debt that UFC's eventual buyer (WME-IMG, as it turned out) would end up taking on.
Here's where the Fed comes in.
After the housing bubble burst in the late-00's, everyone started to panic about debt. Congress then passed a law (commonly called "Dodd-Frank", after the Senator and Representative who sponsored the bill that became law) that gave the United States Federal Reserve increased oversight over large banks (like Goldman Sachs) and the debt deals that they facilitate. The law forces banks to send financial pictures for companies that are planning debt-driven sales (like UFC) to the Federal Reserve so that the Federal Reserve can prevent big banks and certain other large entities in the financial world from taking on too much "risky" debt.
There is a reason that "risky" is in quotes. All debt is risky. There is never a full guarantee that a loan will be paid back. That's why my mom, a very sweet mom who loves me dearly, admonishes me every time I offer a zero-interest loan to a friend. My mom knows that there is no guarantee that I will be paid back, and so my mom believes that there should be some kind of "interest" arrangement to make the loan fair to me. I always respond to my mom that I will always be broke, and so if a friend stiffs me at least a friend got my money and not my local overpriced artisan breakfast spot that charges $6 for two eggs, sunny side up.
Anywhoo, the Fed admonished Goldman Sachs because the Fed felt that Goldman Sachs painted too rosy a picture of UFC's finances.
And the Fed is correct! Correct, at least, that Goldman Sachs painted a very rosy picture of UFC's finances. Anyone who reads the Wrestling Observer every week has an idea of how strong UFC's finances have been over the years, and there is no question that Goldman Sachs' projections of the new UFC owners' ability to cut costs and increase revenues were more optimistic than just about any close follower of UFC's business would have projected.
But here's the problem (and the reason for my less-than-succinct mansplaining of this issue): UFC's debt sold like hotcakes!
After WME-IMG agreed to pay ~$2.6 billion for UFC (with an enterprise value [meaning the value of 100% of the company] of ~$4 billion), Goldman Sachs facilitated a loan to cover $1.8 billion of that purchase.
Goldman Sachs then offered that $1.8 billion in debt to investors. So, large scale investors had the opportunity to "buy" pieces of WME-IMG's $1.8 billion in debt, then receive debt payments (including interest) on a regular schedule.
Goldman Sachs had no problem whatsoever selling that $1.8 billion in debt. In fact, Bloomberg (the same news agency that reported the Fed's warning to Goldman Sachs yesterday) reported that the first $500 million in debt received $2 billion worth of bids! Goldman Sachs was actually able to lower the interest rate that WME-IMG ended up having to pay on their debt because so many large scale investors trusted that WME-IMG will be able to make payments on that first $500 million of UFC sale debt.
So, the Fed is saying "Goldman Sachs made UFC's risky debt look less risky than it really is".
Investors said, "Screw that! UFC's debt looks like it has such little risk that we're willing to take lower interest payments."
Keep in mind, investors had the EXACT SAME INFORMATION that the Fed has. It's not like Goldman Sachs duped investors and hid information that only the Fed has access to. Investors saw that UFC's projected revenue is way higher than their recent actual revenue has been. Investors saw that UFC's current costs are higher than UFC's projected costs after cost-cutting. Investors had Goldman Sachs' report on UFC's finances for months and still were rabidly trying to buy up WME-IMG's debt.
If you're asking, "if investors are rabidly buying the debt and WME-IMG is happy with the interest they're paying on the debt, then why does the Fed care?" GOOD QUESTION. Welcome to the club of countless people who follow the financial industry and wonder why the heck Dodd-Frank inserts the Fed in private financial transactions where both buyer and seller are happy to make the transaction.
Bottom line is, Bloomberg's report on the Fed warning was little more than red meat for anti-UFC folks and anti- Dodd-Frank folks. (And the red meat obviously worked on me!) Anti-UFC folks get to Tweet out a link to a report that contains the words "Fed" "warning" "debt" and "UFC" in it, and folks like me get to mansplain our objections to Dodd-Frank to an unsuspecting audience of MMA fans who just want to enjoy UFC 204 this weekend. (Enjoy!)
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