Goldman Gets Fed Slapdown on Ultimate Fighting Loan

  • Regulators have expressed concern over cash-flow adjustments
  • Central bank is clamping down on risky lending practices

UFC fighter Chris Leben, left, battles UFC fighter Jake Rosholt during their bout at the Rose Garden Arena in Portland, Oregon, on August 29, 2009.

Photographer: Jon Kopaloff/Getty Images

Federal Reserve regulators reprimanded Goldman Sachs Group Inc. a second time for flouting lending guidelines in a risky debt deal it arranged for the $4 billion buyout of Ultimate Fighting Championship.

The rebuke came after the bank appealed an earlier risk warning from the regulators, according to people with knowledge of the matter who asked not to be identified as it is private. The regulator now considers it a substandard loan, the people said. That’s a lower rating than the Fed’s prior classification of the deal as a so-called special mention, which was based on its concerns over accounting adjustments that inflated cash flow projections for the mixed martial arts promoter.

Representatives for New York-based Goldman Sachs and the Fed declined to comment. Deutsche Bank AG, which was the lead underwriter for the junior portion of the deal, has also been notified by regulators that the deal is substandard, the people said. A representative for Deutsche Bank declined to comment.

Regulators have been clamping down on risky lending practices by Wall Street’s biggest banks for more than three years. The latest censure shows they’re not prepared to concede ground even for deals that investors are more than willing to buy, and comes even as President-elect Donald Trump’s administration vows to roll back Wall Street regulations.

Strong Demand

One portion of UFC’s loan offering drew investor orders for more than four times what was being sold as yield-hungry money managers clamored to buy a piece of the deal in August. The company raised $1.4 billion in first-lien and $425 million of second-lien loans after boosting the senior debt on offer and the loans are trading above their sale price.

The strong appetite for the deal allowed the company to lower the interest it was offering on the debt, and the sale of second-lien loans gave it the flexibility to more easily repay the debt compared with bonds.

Goldman Sachs was the lead arranger for the biggest portion of the loans, sold to fund the purchase of the company by talent agency WME-IMG and backed by private-equity firms Silver Lake, KKR & Co. and Dell Inc. founder Michael Dell’s private investment firm. Casino moguls Frank and Lorenzo Fertitta struck the deal to sell UFC in July. A spokeswoman for Silver Lake declined to comment.

After its first review of the UFC buyout loan, the Fed was focused on accounting adjustments that more than doubled the company’s cash-flow projections, people with knowledge of the matter told Bloomberg News in October.

Such earnings adjustments -- known as add-backs -- are a common practice when estimating a company’s future profitability after an acquisition or buyout. What regulators have been reviewing is whether they are too optimistic, making companies appear more creditworthy than they are.

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