As of Sept. 30, SFX said its pro-forma debt would be approximately $75 million in a first lien term loan facility. According to the firm's S-1 filed with the Securities and Exchange Commission, the pro-forma company would have paid $19.7 million in interest expense through the first six months of 2013, or over 21% of the company's overall revenue.
SFX also has just one year to repay or refinance its term loan, a heavy task for a company that warns it will incur losses in 2013 and beyond. In fact, the firm's losses may escalate as a public company, given SFX's stated need to implement better accounting controls and financial reporting.
"We have had a history of losses, and we may be unable to achieve or sustain profitability," SFX says
The company's term loan comes due on September, 15 2014, however, it could attempt to refinance the loan, and under certain conditions, it can be extended the debt until March 13, 2015."We caution you that we may not have the funds necessary to pay principal and interest on our First Lien Term Loan Facility when it matures. Although we may seek to refinance this debt, we may not be able to do so on acceptable terms or at all," SFX says in its S-1 filing. If the debt balance isn't scary enough, SFX's term facility also includes what appear to be very restrictive covenants that signal the business will be operating with a razor thin margin for error. SFX is due to make mandatory prepayments of 75% of its annual excess cash flow and has pledged 100% of the net proceeds from some asset sales, casualty events, and debt issuance to repay its existing facility. If CEO and founder Robert F.X. Sillerman leaves the company, 30.0% of SFX's borrowings will come due in 60 days of that announcement date. Sillerman has entered into a agreement with Barclays, collateral agent on the loans, in which he has personally guaranteed all SFX's obligations under its first lien term loan facility. "We will be in default of the First Lien Term Loan Facility if the Sillerman Guarantee ceases to be in full force and effect or if Mr. Sillerman breaches any material term of the Sillerman Guarantee," SFX states in its S-1.
Party till the Music StopsThe financial picture that SFX portrays in its IPO is risky, but investors will also need to worry about unforeseen problems. SFX admits that the company has "material weaknesses" in its internal controls and financial reporting. Firms that SFX is seeking to buy also contain material weaknesses. "We have identified material weaknesses in our internal controls over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods," SFX states. The company identifies a lack of documentation in connection with awards of stock based compensation, improperly characterizing certain acquisition transactions as having closed prior to obtaining the control necessary for such a characterization, and an unusually large amount of audit adjustments as among the firm's reporting weaknesses.
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