Wed 09/15/2021 13:32 PM
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Relevant Items:
MSG Entertainment’s Covenants Tear Sheet, Debt Document Overview
MSG Entertainment’s Debt Documents

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MSG Entertainment Corp. is a holding company that was previously spun out from MSG Sports Corp. (then named Madison Square Garden Co.) in 2020. The company conducts substantially all its business through MSG Entertainment Group LLC (“Parent”) and Parent’s subsidiaries and operates in two segments: entertainment and Tao Group Hospitality. The former includes a portfolio of venues such as Madison Square Garden and productions such as the Christmas Spectacular Starring the Radio City Rockettes, while the latter includes entertainment dining and nightlife brands.

As the company reported in its recently filed 10-K, the Covid-19 pandemic has continued to have a material impact on its operations as for the majority of fiscal year 2021 substantially all of its entertainment segment operations were suspended and Tao Group Hospitality operated at significantly reduced capacity. The company reports on a fiscal year basis ending on June 30. Rather than reporting EBITDA or an adjusted EBITDA, the company reports adjusted operating income.

On July 9, the company acquired MSG Networks Inc. in an all-stock transaction and, as a result, acquired a $250 million revolving credit facility and a $1.1 billion term loan A facility at MSGN Holdings LP. The MSGN facilities are guaranteed by certain of the borrower’s intermediate holdco parents and certain subsidiaries. The MSGN facility is secured by certain assets of the borrower and guarantors, including a pledge of the equity interests in MSGN Holdings held directly by certain intermediate holdco parents and the equity interests in subsidiary guarantors. The company reported MSG Networks’ LTM adjusted operating income as of fiscal year 2021 of $287 million.

The company’s entertainment division subsidiary Boston Calling Events LLC has a $637 million loan from its noncontrolling interest-holder that is due in April 2023. In addition, MSG National Properties LLC has a $650 million term loan B facility guaranteed by Parent and certain wholly owned domestic subsidiaries. The MSG National Properties facility is secured by the equity of domestic subsidiaries, 65% of the voting securities of foreign subsidiaries directly owned by loan parties (and 100% of nonvoting securities) and certain other property of the loan parties.

However, several notable assets are excluded from the collateral package such as leasehold interests in Madison Square Garden and Radio City Music Hall, the equity of subsidiaries that own Madison Square Garden, and licensing agreements with the New York Knicks and New York Rangers teams.

Though the company did not disclose the figures for MSG National Properties itself, LTM adjusted operating income for the entertainment division as of June 30, or fiscal year-end 2021, was reported as a loss of $255 million. MSG National Properties’ negative adjusted operating income prohibits the company from accessing all leverage-based debt, dividend and investment baskets under its credit agreement.

On the Tao Group Hospitality side, Tao Group Operating LLC is the borrower under a $25 million revolving credit facility and a $40 million term loan A facility. Due to the Covid-19 pandemic, the Tao Group credit agreement was amended to temporarily suspend the fixed-charge coverage ratio, senior debt ratio and total debt ratio under the financial maintenance covenant and to modify certain negative covenants through Dec. 31, modify applicable interest rates and increase a minimum liquidity requirement to $10 million from $5 million.

The Tao Group facility is guaranteed by Parent, the borrower’s intermediate parent holdco and certain of borrower’s domestic subsidiaries, and secured by certain reserve accounts and certain assets of the borrower and guarantors including a pledge of equity interests in the borrower held by borrower’s intermediate parent holdco and in such holdco’s other subsidiaries that are guarantors. The LTM adjusted operating loss for the Tao Group Hospitality division was $15 million.

The company’s capital structure as of June 30 was as follows, pro forma for the MSG Networks acquisition:

 



 
Covenant Conclusions

 
OpCo Debt: MSG National Properties

 

  • Liquidity and financial covenants - As of June 30, MSG National Properties did not have a revolver and it is unclear how much cash, if any, is held at MSG National Properties. The company has reported that the entertainment segment represents approximately 45% of the consolidated revenue for fiscal year 2021, and the company has approximately $1.1 billion in unrestricted cash on a consolidated basis.The credit agreement contains a financial covenant that requires the average daily liquidity - defined as cash and availability under any revolver at the borrower or subsidiary guarantors - during the last month of any quarter to be $200 million. This requirement steps down to $50 million in the event MSG National Properties achieves an investment-grade rating or a total debt ratio of 5x or better.

  • Debt and liens - As of June 30, MSG National Properties could incur $125 million in additional first lien debt, $75 million in purchase money and assumed acquisition debt ($50 million of which is shared with capacity under the general debt basket used in the first lien debt figure noted earlier), and up to $50 million in debt incurred by “Arena Subsidiaries” - MSG Arena Holdings LLC, MSG Area LLC, and any subsidiary holding ownership interests in, and whose assets primarily consist of equity interests in, Madison Square Garden.To the extent the company had sufficient, positive adjusted operating income, it could incur additional leverage-based first lien and junior or unsecured debt, subject to meeting a 3.5x secured debt ratio or a 4x total debt ratio, respectively.

  • Restricted payments and investments - The restricted payment covenant’s “available amount” likely contains zero capacity, as it builds by a percentage (50%) of adjusted operating income starting with the fiscal quarter ending March 31, 2021, and as of June 30, the division’s LTM adjusted operating income was a loss. MSG National Properties can make $20 million in restricted payments plus an additional amount based on liquidity at MSG National Properties over a threshold of $200 million. It can also make up to $100 million in investments, including $50 million in foreign subsidiaries and subsidiaries outside of the guarantor group.In addition to the currently limited amount of restricted payments and investments due to the adjusted operating loss, the credit agreement permanently caps noncash restricted payments at $50 million in the aggregate. Thus, MSG National Properties, and by extension, MSG Entertainment, is currently limited in its ability to shift assets outside of the OpCo group or beyond.

  • Prepayments - The prepayment covenant under the credit agreement limits the company’s ability to prepay unsecured debt, junior debt and payment-subordinated debt unless it can meet a 4x total debt ratio and access the builder basket. As a result, as of June 30, the company could not prepay any of the aforementioned debt.


--Richard Barbour II
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