Estimating Zuffa's Owner's Equity based on S&P's rating of their debt securities

Horrigan used multiple regression analysis in the 1960s to attempt to create a model that would predict S&P and Moody's bond ratings for companies. Basically, they're attempts to determine financial leverage, and correlate that with the subjective ratings that are coming out of the various ratings houses. Horrigan's bond model uses six components to calculate a Z-score, the Z-score is looked up in a table to determine the bond rating.

The Z-score table is as follows for S&P ratings:

2.855 and higher = AAA
2.094-2.855 = AA
1.602-2.094 = A
0.838-1.602 = BBB
0.360-0.838 = BB
Less than 0.360 = B or lower

The Z-score is calculated as follows for S&P:

Z = 1.197 Xsub0 + 0.0337 Xsub1 + 0.272 Xsub2 -0.501 Xsub3 + 4.519 Xsub4 -0.203 Xsub5

Xsub0 is 1 when the bond is senior and 0 if the bond is subordinated
Xsub1 is Total Assets, in 10s of millions of dollars
Xsub2 is Owner's Equity / Total Debt
Xsub3 is (Current Assets - Current Liabilities) / Sales
Xsub4 is Operating Income (EBITDA) / Sales
Xsub5 is Sales / Owner's Equity

I used total debt of 325 mil (this is total debt outstanding per the September report), EBITDA of 1/3 of 325 mil (that was a forward looking item), Sales of 2 times EBITDA (based on the 50% forward looking margin). I plugged a few numbers for working capital and I found that they didn't significantly change the results, so you can either exclude that entirely or use 25 mil (the value of their revolver).

Then you run the calculation inside out to get back to Owner's equity (remembering that total assets = total debt + owner's equity).

So, I'm getting numbers in the 10.5 to 12 mil in owner's equity range, based on the Z-score range for the S&P rating of BB. Technically, you can also get an intercept if the owner's equity is EXTREMELY negative, but that would create negative assets, which is an invalid result.

If you're interested in Horrigan's model, the citation is as follows:

James O. Horrigan. "The Determination of Long-Term Credit Standing With Financial Ratios," Empirical Research in Accounting: Selected Studies, 1966, Supplement to Volume 4, Journal of Accounting Research, pp. 44-62.

This reference is available in JSTOR (the link is to JSTOR), which you can probably access through your public library (I use it online through Boston Public Library's website).