Vendors demand cash following SFX’s corporate rating downgrade

American live events conglomerate, SFX Entertainment, is in the midst of further woes as the company has been downgraded by corporate ratings giants Moodey's Investors Service and Standard & Poor’s.

The rating agencies downgraded SFX following its failed attempt to take the company private. Both rating agencies have suggested that liquidation by the company would be a plausible and accessible route given the company’s poor cash flow.

With its US$325 million debt – composed mainly of senior bonds – due in 2019, SFX are struggling to create confidence in vendors with many calling for upfront cash payments ahead of recent festivals. Vendors for the Electric Zoo festival, which takes place this Friday through Sunday in New York, are refusing to negotiate operation details without upfront cash payment from SFX. The festival attracts more than 100,000 people and hosts some of the biggest names in electronic music including Sydney producer Wave Racer.

The company’s heads are adamant that no changes to the organisation of the event will be made despite the company’s looming financial burdens. Despite these reassurances, the company did announce the cancelation of ONE Tribe festival in Los Angeles, scheduled for this month.

As of June 30, SFX’s most recent earnings report, the company had US$52.2 million in cash and US$5.8 million in availability on its credit facility. At the time, the company said it believed it would have to make US$35 million in payments during the third and fourth quarters. Specifically, Standard & Poor's Ratings lowered SFX’s corporate credit rating to a 'CCC' from 'B-' and also lowered their issue-level rating on the company's senior secured second-lien loan to 'CCC' from 'B-'. Standard and Poor also revised the recovery rating to '4' from '3'. The '4' recovery rating indicates the expectation for average recovery (30%-50%; upper half of the range) of principal in the event of a payment default.

In a statement from Standard and Poor’s credit analyst Naveen Sarma said, "SFX's liquidity and cash flow metrics remain the primary risk factors for the current rating, in our view".

The downgrade reflects not only the significant deterioration of SFX's financial flexibilitybut also their projected concerns for the free operating cash flow (FOCF) index of the company as outlined in 2015, and their subpar performance on Beatport. Sarma went on to state that "We believe the company will need additional cash or borrowing availability in order to meet its operating and working capital needs as well as to fund earnout payments".

With SFX’s current share price below $0.50 per share and with over half a billion dollars lost in 12 months, it’s not surprising then that its market cap valuation is down to less than 1% of the worth of fellow promoter Live Nation.The reality of bankruptcy is looking eminent for Tomorrowland and Beatport owner Robert Silverman.