Credit rating agency Moody’s changed its outlook on Formula One from negative to positive on Thursday to reflect the impact of the coronavirus crisis on a global sport that has yet to race in 2020.
Moody’s did not rule out a full season cancellation and said Formula One has the resources to withstand the eventuality. Moody’s Investors Service along with Standard & Poor’s and Fitch Group, is considered one of the Big Three credit rating agencies of the world.
“Formula One has a strong liquidity and a cost base that is flexible enough to handle a severely restricted 2020 season, which Moody’s would probably consider supporting a complete cancellation,” it said in a statement.
The Liberty Media-owned racing series cancelled its first race in Australia from 15th March with the start of the Monaco Grand Prix in May, and postponed six other races as the countries went into lockdown. Now we see McLaren on Wednesday becoming the first F1 team to put staff on leave and cut the salaries of drivers and executives.
Moody’s said it had confirmed it’s new rating and probability of default of Alpha Topco Ltd, the Formula One holding company, who generated $2 billion in revenues in 2019.
He said the rating reflected expectations of lower earnings and cash flow generation, increased leverage and liquidity erosion, as well as the company’s cost flexibility and low capital expenditure. F1 had cash flows that were resilient due to multi-year contracts, the note added, as well as a history of growing its fan base.
Other factors included the timing of TV contract renewals and the outcome of talks to renew the confidential “Concorde” commercial agreement with the teams and the governing body, which expires at the end of 2020.
“As of December 31, 2019, F1 had a substantial liquidity cushion of approximately $900 million, comprising a cash balance of $400 million and a committed revolving credit facility of $500 million,” the agency said.
It expected this to be sufficient “to absorb the cash outflow from potential repayments of promoter, sponsor and broadcaster advances, team payments, other overheads and interest charges in the event of the 2020 season cancellation”.
However, there was still a degree of risk, despite being considered low, that liquidity of the business would not be sufficient to maneuver through a continuing crisis.
Moody’s stated that Liberty Media had substantial available resources to support Formula One but saw “a relatively high probability” that Formula One would breach a leverage clause whose terms could be modified or lifted.
“Moody’s considers F1 to be relatively well placed to recover from the post-coronavirus crisis, underpinned by the nature of its contractual revenues, strong franchise, large fan base and strong currency conversion”.
He stated that a downgrade of this new rating could occur if a further disruption of the race schedule caused liquidity problems or if a renewed Concorde agreement was negotiated with materially unfavourable conditions for the company.
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