Fitch Ratings has assigned a final Issuer Default Rating (IDR) of 'BB' to
Fitch has also assigned final ratings of 'BBB-'/'RR1' to LNW's senior secured credit facility and 'BB'/'RR4' to LNW's senior unsecured notes due 2028 and 2029. Fitch assigned a 'BB'/'RR4' rating to LNW's senior unsecured notes due 2025. The Rating Outlook is Stable
LNW's rating reflects its conservative leverage profile and solid expected FCF margin for a gaming supplier and mobile developer. Gross leverage is declining slower than anticipated at the time of the
Key Rating Drivers
Stable Outlook Despite Steeper Leverage Trajectory: Fitch forecasts LNW to reach 4.2x and 3.8x gross leverage for 2022 and 2023, respectively, compared to 3.4x and 3.3x at initiation in
The further recovery of LNW's gaming equipment and systems cash flows in 2023, coupled with an anticipated pull back in gaming operations cash flows and stable digital cash flows, will still allow LNW to achieve gross leverage metrics in 2023 consistent with 'BB'. Notably, LNW's strong expected FCF generation (mid-teens margins forecasted in 2023 and beyond) and strong liquidity remain consistent with the rating.
Good Mix ex-Lottery: Pro forma for the lottery and sports betting dispositions, LNW is still a diversified gaming supplier with exposure to traditional gaming (slots, tables, systems), iGaming, social gaming and casual mobile gaming. The divestiture of lottery removed a stable and diversifying cash flow stream with healthy long-term growth rates, although the debt paydown from sale proceeds was viewed positively.
The company's digital adjacencies balance the traditional slot industry's high competitiveness, tepid replacement cycle, and unreliable new casino opening schedule. The company's leading slot systems business (~10% of pro forma revenues) provides a relatively reliable cash stream and its table game business (~9%) is shifting more toward a lease model with operators.
A Leading Gaming Supplier: The company garners low-20% market share for both slot sales and installed base of premium slots in
There are signs of stabilizing market share shifts, with the company registering relatively stable installed base in
Growing Digital Presence: The company operates social gaming and casual mobile gaming through its unrestricted subsidiary,
While daily active users have been volatile, monthly payer users have been stable around 500k the last three years with an 8% CAGR in monetization (600k as of
The company's digital business tends to be hit driven and competitive, especially within social gaming. The business also requires considerable R&D investment and customer acquisition costs. These factors may cause operating cashflows to be more volatile than the traditional slot business; however, digital provides the company increased product diversification and scale.
Fitch expects the company to pursue more casual mobile gaming development as an avenue for revenue growth, which could lead to increased R&D and tuck-in acquisitions for talent or proven game titles. The casual mobile gaming industry is more competitive than traditional slots given low barriers to entry and more formidable publishing peers like
Significantly Reduced Leverage: Fitch estimates gross leverage to be 4.2x by YE 2022 and will improve toward the high-3.0x in fiscal 2023 as the gaming segment's EBITDA fully recovers (specifically equipment and systems adjacencies). This is a significant improvement from the 6x-8x level the legacy business was rangebound within during 2015-2019.
The exit of a controlling shareholder, new board and management were the catalysts for rapid de-levering through asset sales totaling roughly
Strong FCF Generation: Fitch expects the company's FCF generation and margin will reach around
The company's FCF benefits from management's preference for share repurchases over dividends. Fitch expects a majority of FCF to be allocated toward repurchases, tuck-in acquisitions to support its Digital segment and reinvestments within the business. Fitch does not anticipate any meaningful debt paydown beyond the current capital structure (
Parent Subsidiary Linkage: Fitch applied the strong subsidiary/weak parent approach under its Parent and Subsidiary Linkage Rating Criteria. Fitch views the linkage as strong across the company's entities given the openness of access and control by the parent and relative ease of cash movement throughout the structure. Fitch views the entities on a consolidated basis and the IDRs are linked.
Derivation Summary
The company has a similar business mix as peer
In addition, Fitch views the company's credit profile as stronger than
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Company:
Gaming segment revenue growth around 20% in 2022 as the slot sale, systems, and table games verticals recover toward pre-pandemic levels. Fitch forecasts mid-single-digit growth in 2023 and low single-digit growth thereafter, supported by a stabilization in the company's overall installed base in the 58,000-59,000 range and healthy ADRPU;
iGaming experiences mid- to high single-digit growth annually, supported by the rollout of LNW's Live Dealer platform and other online market advances, and Fitch does not assume any incremental jurisdictions legalizing (seven
EBITDA margins in the high 30% range. Fitch forecasts
Capex is 10% of revenues in 2022 but declines to around 8% annually thereafter given the divestiture of lottery. This includes royalty payments on license obligations;
Total gross debt balance steady around
Capital allocation is balanced between shareholder returns and tuck-in M&A in the digital space. Fitch assumes share repurchases are the primary avenue to return capital to shareholders.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Gross leverage sustaining below 3.0x;
Stable or growing slot share, particularly in
Expanding footprint in casual gaming demonstrated by successful launch of new games and or an increase in user-based metrics (both paying and non-paying).
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Gross leverage sustaining above 4.0x;
Slots business suffering from market share loss or the deterioration of operating fundamentals;
Greater revenue concentration in the more cyclical and hit-driven casual mobile gaming business.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
The company has multiple sources of liquidity that will support its growth strategy and fund shareholder returns. The company had
Capex is manageable in the context of the company's improved cash flow from operations, which should remain around 8% of revenue. This includes 'payments on license obligations' that get reported in the company's cash flow from financing and is related to requirement payments on brand licenses that are akin to operating expenses.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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