Goldman, Macquarie Sell Apollo’s ‘American Idol’ Loan at Highest Discount

Goldman Sachs Group Inc. (GS) and Macquarie Group Ltd. (MQG) sold a $200 million loan backing Apollo Global Management LLC’s 2011 buyout of CKX Inc. (CKXE), the owner of the television show “American Idol”, at the steepest discount on record.

The first-lien credit was sold for 78 cents on the dollar, according to three people familiar with the transaction, who declined to be identified because the deal is private. That’s the biggest so-called original issue discount for U.S. bank debt, according to Standard & Poor’s Leveraged Commentary & Data.

The loan sale allows the banks to reduce their exposure to CKX after the company failed to sell $360 million in bonds in July to pay for the $509 million buyout by Leon Black’s Apollo after credit markets weakened due to Europe’s debt crisis. The discount on New York-based CKX’s term loan follows a decline in viewership of the company’s “American Idol”, according to Michael Altberg, a credit analyst with S&P in New York.

“They’re heavily reliant on ‘American Idol’,” Altberg said in a telephone interview. “While the show might have more near-term visibility, in five, six years from now there’s a lot more risk around where that show will be.”

The original issue discount on CKX’s first-lien loan is about 20 cents below the average in January of 98.14 cents on the dollar for loans rated B+/B, data from S&P’s LCD show. The OID reduces proceeds for borrowers and can cut underwriting profits for banks while boosting yield for investors.

Fewer Viewers

American Idol,” the most-watched series on U.S. television, drew 17 percent fewer viewers for the debut of its 11th season last month than for its 2011 premiere. This year’s show attracted 21.9 million viewers, News Corp. (NWS)’s Fox network said in an e-mailed statement on Jan. 19, citing Nielsen data.

A “high concentration” of CKX’s earnings before interest, taxes, depreciation and amortization come from “American Idol” and related revenue, according to a Jan. 18 report from Moody’s Investors Service.

Moody’s lowered CKX’s ranking to B3, six levels below investment grade, from B2 when CKX was taken private by Apollo in June. Junk debt is rated less than Baa3 by Moody’s and below BBB- by S&P.

CKX, which owns rights to the name, image and likeness of Elvis Presley and Muhammad Ali, had about $258 million of revenue in the 12 months ended Sept. 30, according to Moody’s.

“Results have been a little weaker than we had anticipated, and their show Viva Elvis in Las Vegas is expected to be canceled,” Scott Van den Bosch, senior analyst at Moody’s, said in a telephone interview. “Those events have been weighing on the company.”

Bridge Loan

CKX’s bridge financing was replaced by a $200 million first-lien loan due in 2017 and a $160 million second-lien portion maturing in 2018.

“The term loans do not amortize, which means there’s no requirement to pay down these term loans over time,” said S&P’s Altberg. “So there is the risk of these bullet maturities 5 to 6 years from now.” A so-called bullet maturity means the entire principal amount is due in a lump sum payment when the debt expires.

The company’s first-lien loan will pay interest at 9 percent, according to a fourth person with knowledge of the matter, who also declined to be identified because the transaction is private. The debt has 15 percent yield-to- maturity, said three people.

Thomas Benson, chief financial officer at CKX, Tiffany Galvin, a spokeswoman for Goldman Sachs, and Paula Chirhart, a spokeswoman for Macquarie, declined to comment.

Bondlike

“It’s a loan but it’s structured like a bond,” Moody’s Van den Bosch said. “It’s fixed rate, there’s no amortization payment, it’s covenant-lite and the incurrence test is the only limitation that restricts additional debt from being issued.”

Incurrence tests require the borrower to be in compliance with certain financial ratios only when it is seeking a specific action such as a dividend or acquisition. First-lien debt is repaid first in a bankruptcy or liquidation.

CKX’s leverage is “moderately high” with debt to Ebitda of 4.9 times, according to Moody’s, including lease expenses and preferred shares treated as debt. The ratings company gave a B1 grade to CKX’s $200 million first-lien loan and Caa2 to its $160 million second-lien loan.

“We think ‘American Idol’s’ performance will be relatively stable over the next few seasons,” said S&P’s Altberg. “It’s the longer term outlook that has less certainty. They have to basically find new shows that are going to work that will help to replenish their portfolio down the line.”

-- With assistance from Andy Fixmer in Los Angeles. Editor: Chapin Wright, Faris Khan

To contact the reporters on this story: Christine Idzelis in New York at cidzelis@bloomberg.net; Krista Giovacco in New York at kgiovacco1@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

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