In a first for the music industry, the deal was structured as a whole business securitization, which means that all of the company’s income streams and assets -- including its licenses to music users and its contracts with songwriters -- are backing the bonds. This type of structure provided a credit enhancement that helped the bond offering be priced at lower interest rates. In the music industry, in the past most secured debt deals have typically been done by music retailers, usually secured by inventory, in exchange for term and/or revolving loans.
Since the SESAC bond offering is secured, that means in the event of financial difficulties leading to a default and a Chapter 11 bankruptcy filing, the bond holder's loan would take priority before addressing any other money owed to vendors or even SESAC affiliates. The bonds are seven-year notes due in July 2026.
SESAC financials show the company to be healthy and growing stronger every year. According to credit ratings from the Kroll Bond Rating Agency and Morningstar Credit Ratings, in its most recently completed fiscal year SESAC produced $79.8 million in earnings before interest, taxes, depreciation and amortization (EBITDA) on revenues of $274.8 million. While SESAC now carries what some might consider to be a high debt-to EBITDA ratio at a 6.7 times multiple, its financials show it should be able to handle the debt load. With EBITDA at $79.8 million and annual interest payments of about $27.65 million on the bond portion of the company’s debt, that provides nearly a 3-1 EBITDA to interest coverage ratio. That's a healthy cushion that likely comforted the bond investors when they were buying the debt, and should also comfort all other creditors.
Moreover, SESAC has been carrying large amounts of debt with no problem handling it since at least 2010 when it had about $140 million in debt and only $117 million in annual revenue. After Rizvi Traverse bought the company in 2012 those owners also piled on debt and by 2016, the year before it was sold to Blackstone, the company’s balance sheet carried $430 million in debt, according to credit agency reports at the time. That debt was replaced when Blackstone acquired SESAC, which in turn was replaced by the latest bond offering.
In addition to the bond offering, the company also received a commitment for a $30 million revolver, which, according to sources familiar with the deal, hasn’t yet been drawn down. With SESAC’s strong cash flow, the company likely uses its own cash to finance operation, instead of tapping the revolving credit facility.
According to the Morningstar analysts, SESAC has grown at a 12.9% compound annual growth rate since 1994, when revenue was $9 million, according to other SESAC related documents obtained by Billboard through the years. By 2004, the company had grown to about $57 million in revenue, by 2014 to about $206 million, and last year to nearly $275 million.
In SESAC's 2016 fiscal year, the financial results on which the Blackstone acquisition was mainly based, the PRO had $69.1 million in EBITDA on revenues of $247.5 million. That means in paying $1.125 billion, the company traded hands on an EBITDA multiple of 16.3 times.
In its most recent fiscal year, which both credit agencies label as 2019, EBITDA had a 29% ratio to revenue, but the company’s expense structure is not revealed in those reports. While SESAC's two main competitors, ASCAP and BMI, have had expense structures of about 10% in recent years, their expense costs ranged at about 12%-13% of revenue when they had a smaller revenue base.
Other information disclosed in the credit reports includes reporting that SESAC has approximately 34,600 songwriter and publisher affiliates, including Bob Dylan, Rick Nielsen, Adele and the recently deceased Ric Ocasek. It also has 127,000 licensees, using its blanket license for its music. In addition, the SESAC owned Christian Copyright Licensing International performance rights organization provides performance licensing to about 150,000 churches and private schools.
Of the $274.8 million in SESAC company revenue, $20.4 million was generated by the Harry Fox Agency mechanical licensing operation and the Stephen Arnold Group production music company. Meanwhile, the remained $254.4 million was generated by the operations of the company's performing rights organization.
In addition to the company’s $274.8 million recorded as revenue, the Harry Fox Agency also administers large amounts of collections that it can't book as revenue since it is acting as an agent. In that capacity, it can only book as revenue for what it makes from the administration of those collections, so only those earnings are included in the $20.4 million credited to both HFA and SGA. While the company specifically doesn't report those collections and they are not mentioned in the credit agency report, in the past few years sources have put total collections for the company in the range of about $450 million, which means that in recent year HFA and possibly SESAC handled another $175 million or so annually in administration that it doesn’t book as revenue.
Getting back to the revenue SESAC books, while the two credit reports break out the source of SESAC funding by type of licensing and other sources, Billboard extrapolated for just the PRO portion of the company -- excluding Harry Fox and Stephen Arnold -- to estimate that general licensing to stores, hotels, clubs, bars and others comprises 42.4% of revenue. Otherwise, television amounts to 23.5% of revenue, digital to 16.3%, radio to 10.2% and payments from foreign collection management organizations to 6.8%. SESAC declined to comment for this story.
The bond offering was issued by SESAC Finance, with Guggenheim Securities serving as the structuring advisor and book runner, FTI Consulting as the back-up manager, and Citibank as the trustee.