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Goldman Sachs said to receive Fed warning on UFC buyout debt

Friday, October 7, 2016 - 13:53

Federal Reserve bank supervisors cautioned Goldman Sachs Group Inc. over risks in a debt deal it arranged to fund the US$4 billion buyout of Ultimate Fighting Championship, according to people with knowledge of the matter.

[NEW YORK] Federal Reserve bank supervisors cautioned Goldman Sachs Group Inc over risks in a debt deal it arranged to fund the US$4 billion buyout of Ultimate Fighting Championship, according to people with knowledge of the matter.

The warning came in recent days as regulators continue their campaign to rein in risky lending practices by Wall Street's biggest banks. 

Regulators, who have criticised financing deals where a company's debt reaches higher than six times a measure of its earnings, focused on how an accounting adjustment boosted cash flow projections when the UFC debt sale was being marketed, the people said.

They asked not to be identified because the matter is private.

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Such earnings adjustments - known as add-backs - can make companies appear more creditworthy and have become a common practice in leveraged finance deals. 

Representatives for the New York-based Goldman Sachs and the Fed declined to comment.

Riskier borrowers may have an incentive to show better financial metrics because the Fed and the Office of the Comptroller of the Currency are increasing pressure on banks to adhere to lending guidelines they first laid out in 2013.

Regulators have been trying to limit banks' exposure to loans made to heavily indebted companies. They intensified scrutiny of the banks by moving to conduct more frequent reviews of lending practices from this year.

A report from agencies including the Fed in July found that the risk from leveraged lending at US banks remains high even as the industry improves its underwriting practices.

Leveraged loans - a type of high-yield debt that's become increasingly attractive as the Fed maintains a near zero interest-rate policy - make up 63 per cent of all the credit considered inadequate by regulators in the report, known as the Shared National Credits Program 2016 Review.

Yield-starved investors flocked to UFC's debt offering in August, putting in orders for more than four times what was being sold for one portion of the deal. In all, the company raised US$1.4 billion first- and US$425 million second-lien loans after boosting the senior debt on sale.

This despite a balance sheet that would be more than eight times leveraged without applying adjustments.

Casino moguls Frank and Lorenzo Fertitta sold the mixed martial arts promoter in July to a group led by talent agency WME-IMG and backed by private-equity firms Silver Lake Partners, KKR & Co and Dell Inc founder Michael Dell's private investment firm.


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