Bally’s Corp. got its first-ever ‘B’ ranking from Fitch Ratings, also giving positive ratings to both secured and unsecured notes issued by the growing casino company.
First, Fitch analysts applauded Bally’s acquisition of internet content provider Gamesys, writing that it showed “improving diversification within both land-based and digital businesses and healthy underlying operating trends. The ratings also consider adequate liquidity and good discretionary free cash flow, which will support investments within the business, planned [mergers and acquisitions] and project capex.”
Also taken into account was the stated intent of Bally’s management to lower the company’s leverage to 4.5 times equity by 2023, partly through allocation of free cash flow toward debt retirement. “Continued strong operating performance at the U.S. land-based business (including 2020 acquisitions) and Gamesys through the merger integration could also drive the ratings higher.”
Leverage is expected to decrease to 5.6X by next year, mostly through growth of cash flow. It currently stands at six times equity, escalating to eight times when rental payments to Gaming & Leisure Properties Inc. are taken into account. Unlike most gaming giants, Bally’s still owns the majority of its real estate, as does competitor Boyd Gaming.
Fitch was also pleased with Bally’s geographic diversification. When the purchase of the Tropicana Las Vegas closes, Bally’s will have 16 casinos spread across 14 states (it has two in Rhode Island, representing 17 percent of total cash flow).
“The M&A strategy has diversified cash flows away from the Northeast and has primarily centered around buying underperforming properties at discounted valuations. Bally’s properties are typically not market leaders and the company has over $200 million of growth capex planned to support competitiveness,” analysts wrote. They added that Bally Interactive would provide further diversity later this year, bringing sports betting and online gambling into the fold.
As for Gamesys, not only will it provide the infrastructure needed for Bally’s Interactive, it gives Bally’s reach into the United Kingdom and Japanese online-gaming markets. This latter point was one of concern to Fitch, given the pressure for greater regulation in the U.K. and the total lack of it in Japan.
“The main risk surrounding unregulated markets is they may develop more stringent regulations, which can adversely affect Gamesys’ margins or may force [it] out of the market.” Also, managing offshore Gamesys from out of the U.S. may pose a challenge, analysts opined.
Predicting a full recovery for U.S. regional gaming by the end of 2021, Fitch lauded Bally’s land-based performances, which in certain instances was running ahead of banner year 2019. Cash-flow margins were predicted to remain strong, thanks to greater efficiency and cutbacks on marketing and player amenities.
What Fitch doesn’t expect is near-term revenue propulsion from Bally’s Interactive, blaming an “extremely competitive, loss-leading” market and a platform still in development. The latter won’t roll out until next year. Gamesys was also faulted for “smaller-scale and weaker diversification than peers Flutter Entertainment … and Entain.” (Flutter owns FanDuel.)
The day before the Fitch report, Bally’s pre-announced its second-quarter results, with revenues foreseen in the $258 million-$268 million range. “Management announced the strong performance was driven by better than expected performance at BALY’s land-based casinos (though we believe Atlantic City is an exception and will be management’s focus point for a turnaround),” reported Truist Securities analyst Barry Jonas.
“In addition, BALY has arranged bridge financing for the Gamesys transaction to comply with U.K. regulatory requirements. … There was no additional news regarding the previously announced strategic investor, though we believe the focus may potentially shift to an investment based primarily on strategic merits, given less need for capital. The Gamesys transaction is still expected to close in Q4 of this year, as previously announced.”
In a separate note, Jonas wrote that the earnings preview (Bally’s announces final results on August 9) was “not as simple as beat and raise, but is staying the course.” He elaborated, “Gaming fundamentals looked strong in Q2, but stocks have sold off around peak earnings concerns, soft sports betting/igaming sentiment and more recently around COVID Delta variant concerns. … But the recent COVID sell-off feels driven by a ‘shoot first, ask questions later’ mentality. As we think gaming fundamentals and stocks really shone amidst pre-vaccine COVID panic, they could/should also do the same in a post-vaccine environment.”
