Rating Action Overview

We expect that Inter Media And Communication SpA (MediaCo)'s recently announced €415 million five-year secured bond offering will alleviate near-term refinancing and liquidity risks at the parent level.

• The proceeds will be used to refinance MediaCo's existing 2022 notes and a €50 million revolving credit facility at parent company F.C. Internazionale (TeamCo).
• Despite the potential for substantial cash flow volatility upon expiry of short-term broadcasting and sponsorship contracts, MediaCo's debt service is supported by TeamCo's strong brand, long track record of Serie A participation, and a structurally senior position to most of TeamCo's expenses.
• We assigned our preliminary 'B' long-term issue rating to MediaCo's proposed bonds.
• The stable outlook reflects our expectation that Inter will continue playing in Italian football's top division, allowing MediaCo to benefit from sufficient cash flows to service its new debt issuance and support its refinancing needs when the bonds mature in 2027.

Project Description And Key Credit Factors

Inter Media and Communication SpA (MediaCo) is the main financing vehicle for Italian football club F.C. Internazionale (Inter or TeamCo). MediaCo services its bond issuances through media and sponsorship contracts receivables. TeamCo depends on the distributions it receives from MediaCo to fund part of its operations.

Strengths

• TeamCo's long track record of participation in Serie A, Italian football's top division that generates the fourth-highest broadcasting revenue among European domestic football leagues.
• The security package comprises TeamCo's trademark and intellectual property, a key business asset.
• The structural seniority of MediaCo-issued debt to TeamCo's financial and operational expenses, including players' salaries.

Risks

• The short-term nature of the broadcasting and sponsorship contracts, typical of the live sports industry, exposes cash flow to potential volatility.
• The substantial refinancing risk for MediaCo's debt.
• MediaCo's ability to repay its debt is somewhat dependent on TeamCo's operations and financial conditions.
• TeamCo's unstable capital structure, which gives rise to a dependency on shareholder support to avoid liquidity shortfalls.

Rating Action Rationale

MediaCo's new issuance will help alleviate near term liquidity risks at TeamCo, but substantial refinancing risk exposure will remain on the bond maturity date.  The proposed bond issuance will extend TeamCo's debt tenor and remove contractual debt maturities inside of the next 12 months. This, in conjunction with our expectation that TeamCo will receive limited support from its shareholders, somewhat alleviates liquidity pressures over the next 12-18 months. On the negative side, most principal will remain outstanding on the January 2027 bond maturity date, exposing creditors to substantially larger refinancing risk. We anticipate that approximately $390 million (more than 90% of the issuance amount) will remain outstanding on its maturity date. This refinancing risk, combined with somewhat limited visibility on long-term operating and financial performance, as well as a reliance on access to additional financing to service its quasi-bullet debt, constrains our rating assessment. That said, we also note that the project life coverage ratio (PLCR) at maturity of about 2.50x, which denotes some coverage and project value beyond the proposed debt life.

MediaCo is exposed to high cashflow volatility given its dependence on TeamCo's on-pitch performance. A significant portion of MediaCo's revenue entitlement is associated with TeamCo's media rights revenue from Serie A and the Union of European Football Associations (UEFA) competitions. Such revenues depend to different degrees on TeamCo's on-pitch performance, which we consider inherently unpredictable and, to a significant degree, on TeamCo's economic resources and investment in players. That said, Serie A revenue is moderately stable, based on the current allocation method, in which 50% of the proceeds are shared equally among the Series A teams, while historical performance is considered for the allocation of the remaining share. In contrast, UEFA revenue is strictly dependent on Inter's Serie A ranking in each season and, thereafter, on its progress in either the UEFA Champions League or UEFA Europa League. Consequently, this revenue is more exposed to on-pitch performance compared to Serie A revenue. The commercial exploitation of the F.C. Internazionale brand through sponsorship contracts is also strictly related to sport performance and especially on the club's international visibility, which it can improve through successful participation in UEFA competitions. Poor performance by TeamCo's first team could adversely affect its popularity, brand, and ability to attract and retain top players. As a result, being associated with the team may be of less value to sponsors.

Nevertheless, TeamCo's long standing position in Serie A, Italian football's top division, provides some stability to MediaCo's revenue base.  Inter has participated in all Serie A seasons since its inception and it is the only club that has never been relegated to Serie B. Provided that TeamCo continues to play in Serie A, we expect that MediaCo will have access to a moderately stable revenue from Serie A media rights, which represents its main line of income.

Chart 1

We also believe that MediaCo benefits from a strong brand that promotes sponsorship revenue and mitigates renewal risks. Inter is one of the most popular teams in Serie A, making its brand one of the most recognizable and valuable. Although sponsorship contracts tend to have short-term maturities, we believe that the team's performance, combined with the strength of Inter's brand, can mitigate the risk that such contracts may not be renewed or replaced by new sponsors on similar terms. With limited live sports because of the COVID-19 pandemic, MediaCo has faced a tougher sponsorship market, following the expiration of its longstanding contract with Pirelli and the termination of its lucrative Asian sponsorship contract with iMedia that was worth about €25 million a year. Nonetheless, the club has been able to leverage its strong brand and alleviate the impact, with a beneficial multi-sponsor strategy for the main shirt sponsorship, partnering with Socios.com (not rated), Zytara Labs (not rated), and Lenovo Group Ltd. (BBB-/Positive/--) from 2022.

Despite its structurally senior position to the majority of Inter's financial and operational expenses, MediaCo's and TeamCo's financial conditions are closely related  If the first team, which TeamCo manages and pays for, does not compete, MediaCo's cash flow may suffer, since it has priority access to most of TeamCo's revenue. In turn, if MediaCo does not collect its receivables, or if it is prevented from upstreaming cash to TeamCo, TeamCo may not have sufficient resources to fund its operating costs and operations, since MediaCo is only responsible for marginal operating costs. Employee wages--most of which are player salaries--represent the bulk of operating costs for a football club, being the responsibility of TeamCo. This, and the fact that MediaCo owns the Inter brand, provides creditors with some protection if TeamCo enters a financial distress scenario. However, in our opinion, this does not completely eliminate the risk associated with TeamCo's operating and financial performance.

Table 1

Compared with most secured financing that we rate, the creation and perfection of security interests is more challenging. Italian law does not permit the grant of security over the receivables arising from future contracts or arrangements. Therefore, MediaCo and TeamCo will be required to enter into future security assignment agreements in respect of receivables arising under future sponsorship agreements and media contracts. The recurrent need to create and perfect security interests under Italian law exposes creditors to an ongoing risk of potential challenges by an insolvency administrator or by other creditors of TeamCo under the rules of avoidance or clawback in Italian bankruptcy law.

The final ratings will depend upon receipt and satisfactory review of all final transaction documentation, including legal opinions. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. If S&P Global Ratings does not receive final documentation within a reasonable time frame, or if final documentation departs from materials reviewed, S&P Global Ratings reserves the right to withdraw or revise its ratings.

Outlook

The stable outlook reflects our expectation that Inter will continue playing in Italian football's top division, allowing MediaCo to benefit from sufficient cash flows to service its new debt issuance and support its refinancing needs at that point.

Downside scenario

We could lower the issue-level ratings if we consider that the pandemic could cause permanent operational and financial damage to Italian football or if there are liquidity concerns at TeamCo. This could occur, for example, if we expect a significant repricing of key contracts or if any key stakeholders take steps that demonstrate elevated risk to TeamCo's business model.

Upside scenario

An upgrade is unlikely in the near future, given the rating is driven by the post-refinancing phase. This would require greater visibility regarding the long-term cash flow, supported by contracted revenue.

Base Case

Assumptions

• Final ranking in Serie A: Seventh position on a yearly basis.
• Contract value renegotiation: Contracted value until 2024-2025 and no increase versus the previous contract thereafter.
• Allocation criteria of revenue: Broadcasting rights within Serie A allocated in line with 2022-2024 contracts.
• Other championships: No additional revenue arising from participation in UEFA championships.
• Other sponsorships: Current value renewed at flat value.
• Expenses: Fiscal year 2021 costs increase in line with long-term consumer price index (2%) year on year.
• Service agreement fee: €5.0 million
• Taxes: Regional tax (IRAP) and corporate tax (IRES) calculated on a stand-alone basis.
• The refinanced bonds to pay interest of 9%, with a 15-year tenor maturing in 2042.

Key metrics

• The preliminary operations phase stand-alone credit profile (SACP) is constrained by our assessment of the post-refinancing period, during which annual debt service coverage ratios (ADSCRs) are lower than before January 2027, due to our assumption of a higher cost of debt (interest and debt amortization) after refinancing, and lower revenue visibility in later years.
• We assess the preliminary operations phase SACP at 'b', reflecting our expectation that MediaCo will generate a minimum ADSCR of at least 2.08x after refinancing. Before 2027, we project a minimum ADSCR of 2.75x.

Downside Case

Assumptions

• Post-refinancing, TeamCo is relegated twice over our forecast period and promoted back to Serie A the following season.
• While in Serie B, MediaCo will receive a €25 million parachute payment from Serie A.
• While in Serie B, sponsorship revenue will generally drop 35%, with some exceptions.
• Operating costs increase 50% compared with the base case.
• The refinanced bonds to pay interest of 16%, with a 15-year tenor maturing in 2042.

Key metrics

• Under the proposed bond issuance, MediaCo can withstand a relegation scenario in line with our assumptions with the support of its available liquidity sources, largely owing to its limited debt service obligations.
• However, the substantially higher amount of debt needing refinancing at maturity reduces MediaCo's capacity to survive a relegation post-refinancing where the visibility on its contracted revenue is weaker. This is neutral to the operations phase SACP, which remains at 'b'.

Rating Score Snapshot

Operations phase SACP (senior debt)

• Operations phase business assessment: 11
• Preliminary SACP: b
• Downside impact on preliminary SACP: Neutral
• Liquidity: Less than adequate
• Comparative analysis assessment: Neutral
• Adjusted preliminary operations phase SACP: b
• Operations counterparty ratings adjustment: Not applicable
• Financial counterparty ratings adjustment: Not applicable
• Operations phase SACP: b

Modifiers (senior debt)

• Parent linkage: Linked
• Structural protection: Neutral
• Senior debt issue rating: b

Operations phase SACP

• MediaCo is exposed to volatile cash flows with limited visibility. MediaCo has limited visibility on long-term operating and financial performance and relies on access to additional financing to service its bullet debt. This volatility stems from the short-term nature of media and broadcasting agreements and limited long-term visibility on the value of sponsorships. This leads to an operations phase business assessment (OPBA) of '11' for MediaCo, the highest in our rated portfolio.
• Owing to the legal and structural protections in place, we consider MediaCo, to a certain degree, insulated from TeamCo from a credit-risk perspective. To accommodate these unique credit characteristics, we rate the debt issued by MediaCo based on our "General Criteria: Principles Of Credit Ratings" methodology. This rating approach borrows from our corporate and project finance rating frameworks. The rating outcome reflects the weaker of the assessments under the two frameworks.
• To assess and quantify the substantial refinancing risk to which MediaCo's bonds are exposed, we take their maturity date and simulate a debt refinancing through an amortizing instrument. We therefore consider the forecast debt service coverage ratios post 2027 as a stronger indicator of creditworthiness. Considerations regarding the importance of TeamCo's continued operations for cash flows at MediaCo also remain at the core of our project finance assessment.

Liquidity

• The bond will benefit from a fully funded reserve that aims to cover the lesser of the peak annual interest service and half of peak annual debt service.
• It will also benefit from a requirement for MediaCo to prefund the two months of operating expenditure, in addition to the current month, before cash flows can be distributed to TeamCo.
• That said, due to the high potential for cash flow volatility, we view liquidity as less than adequate.

Recovery Analysis

The recovery rating on the notes is '5', reflecting our expectation of modest recovery (10%-30%; rounded estimate: 20%) in the event of a payment default.

Key analytical assumptions

• The recovery scenario analysis begins from the downside scenario.
• We assume a default in 2024 when the team is relegated to Serie B.

Simulated default assumptions

• We assume that TeamCo has either defaulted or restructured on top of playing in a low division, meaning that no meaningful broadcasting revenue will be received.
• Given most of the major sponsorship contracts are short-term and expire in 2025, we only include cashflows up to 2025.
• Cash flows post default are discounted back at 9.0%, in line with peers in the portfolio.

Simplified waterfall

• Discounted Cash Flow: €90 million
• Administrative expenses and interest: €5 million
• Debt outstanding: €415 million

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Criteria | Corporates | Project Finance: Project Finance Transaction Structure Methodology, Sept. 16, 2014
• Criteria | Corporates | Project Finance: Key Credit Factors For Social Infrastructure, Accommodation, And Entertainment Project Financings, Sept. 16, 2014
• Criteria | Corporates | Project Finance: Project Finance Operations Methodology, Sept. 16, 2014
• Criteria | Corporates | Project Finance: Project Finance Framework Methodology, Sept. 16, 2014
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• Criteria | Corporates | Project Finance: Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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