Scientific Games, the newly spun-off lottery subsidiary of Light & Wonder now owned by Brookfield Business Partners, received a “B” default mark from Fitch Ratings on Tuesday.
The investor service cited Scientific’s high leverage (7.5 times cash flow) as its main reason for caution. On the plus side, it noted “SG Lottery’s solid market position in the lottery industry that generates high margins, durable cashflows, and discretionary [free cash flow].”
Brookfield spent $6 billion to pry Scientific away from Light & Wonder. Fitch analysts predict that Scientific will lower its leverage to six times cash flow by next year, “as EBITDA grows modestly through the lottery industry’s healthy underlying fundamentals and recent new contract wins.” Fitch believes the lottery business “can withstand higher leverage than traditional casino gaming, given its favorable characteristics.”
The ratings service reeled off a litany of Scientific strengths, including 70 percent market share of global instant-ticket business, in addition to “a full suite” of i-lottery systems and instant games. “A long-term operating record is a competitive advantage when bidding on new concessions,” Fitch observed, adding that Scientific had roughly 150 contracts in 60 countries.
Calling this a credit strength, Fitch explained, “Lottery exhibits favorable characteristics relative to other forms of gambling. Lottery is convenient and has broad appeal, exhibits less cash-flow volatility, and has delivered stable low- to mid-single-digit growth rates. The industry is less exposed to competitive threats seen elsewhere in the gaming industry.”
The analysts also noted the durable cachet of lotteries, which have maintained market share in the face of casino inroads in states such as Illinois, Ohio, Massachusetts, and Pennsylvania. Should additional states legalize lotteries – and it was hotly debated in Alabama during the last legislature – Fitch expects Scientific to grow with it, maintaining market share.
They conceded that lotteries are a capital-intensive business, “as concessions can require meaningful upfront capex for systems/equipment installation and some jurisdictions mandate material, one-time payments as a condition to be awarded long-term concessions.” This is especially so right now for Scientific, due to the aforementioned contract victories. But Fitch expects this capital exposure to lessen over time. Citing “solid” cash-flow margins and “strong” operational income, Fitch projected cash-flow margins of 10 percent going forward, “solid for the gaming industry.”
The analysts likened Scientific’s credit rating with those of Bally’s Corp. and Great Canadian Gaming, even Caesars Entertainment despite the high leverage. It out-positioned rivals Everi Holdings, “which is exposed to the more volatile and competitive slot machine sub-sector” (BB-) and Aristocrat Leisure (BBB-). Fitch also assumed elevated capital reinvestment in the next two years, as well as low double-digit growth in revenue and no significant mergers or acquisitions. “Excess cash flow is reinvested in the business or distributed to shareholders to extent permissible under debt covenants.”
Fitch also liked Scientific’s financial position, with $30 million cash on hand and a $440 million revolving line of credit untapped. It also receives $50 million in a year in distributions from joint-venture partners.
“This compares with manageable annual amortization of $25 million and no material upfront concession payments/investments until its JV’s Italy Scratch and Win contract expires in 2028.”
Still, despite the leverage, Fitch is operating on the assumption that debt retirement will be a lower Scientific priority than capex and shareholder dividends.
