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Aug 8 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Intralot SA's (Intralot) EUR325m 9.75% Eurobond due in August 2018 issued by the company's wholly-owned entity Intralot Finance Luxembourg S.A. a senior unsecured rating of 'BB-' with a Recovery Rating of 'RR3'.
The rating action follows the review of the final terms of the bond issue conforming to information already received by Fitch apart from the higher than expected size of the bond placement which has been raised by EUR25m and the addition of a debt incurrence leverage covenant which is considered positive for bondholders.
Intralot's Long-term Issuer Default Rating (IDR) is 'B+' with a Stable Outlook.
Senior Unsecured Ranking
The EUR325m bond has been issued by Intralot Finance Luxembourg S.A., a Luxembourg-based financial vehicle wholly owned by Intralot through Intralot Global Securities B.V. ranking as a senior unsecured obligation pari passu with its bank debt. It benefits from guarantees from Intralot SA and by the main operating subsidiaries of Intralot Global Securities B.V. These guarantors will account for approximately 70% of group assets and EBITDA.
Bond Notched Up from IDR
Fitch considers that expected recoveries upon default would be maximised in a going-concern scenario rather than in a liquidation scenario given the asset-light nature of Intralot's business. Fitch has applied a discount of 40% to Intralot's FY12 consolidated EUR177m EBITDA to reflect downside risks as well as the material minority interests in some of its subsidiaries and a 4x distressed multiple to derive a distressed enterprise value of EUR431m. Taking into account the new debt structure including the EUR150m revolving credit facility (RCF) as fully drawn, we assess the recovery rate for the senior notes in the 51%-70% range ('RR3') leading to a one-notch uplift to the senior unsecured rating from the IDR of 'B+'.
Adequate Post-Issuance Liquidity
Intralot will use the bond proceeds to repay the principal amount of EUR140m outstanding of the convertible bond maturing in December 2013 plus the applicable redemption premium and to refinance EUR174m of bank debt due in December 2014. As a result, Intralot now has no more debt due in 2013 and a more manageable amount of EUR80m due under the syndicated facility in December 2014. Most of its remaining debt is the bond due in 2018. Liquidity is further supported by pro-forma EUR100m of cash and an undrawn EUR150m RCF under the 2014 syndicated facility
Profit Stability, Appetite for Growth
Intralot's IDR reflects its established track record of winning and retaining high profile gaming contracts, solid scope for steady EBITDA growth from its Licensed Operations division, a well-diversified contract portfolio and its currently moderate leverage. These positives are contrasted by the low credit quality of some of the countries in which it operates and an increasingly spread out business strategy that could require further investments in future, thus compromising free cash flow (FCF) generation capability (see "Fitch Rates Intralot SA 'B+', Outlook Stable; Rates Bond 'BB-(EXP)'/'RR3'" dated 17 June 2013 at www.fitchratings.com.)
Positive pressure on the ratings would occur if Intralot met most of the following rating factors on a sustained basis:
- Positive EBITDA growth derived from stronger return on capital on existing and future contracts with limited capex outlays.
- Funds from operations (FFO)-based net lease adjusted leverage reducing sustainably below 3.0x, with cash deposited predominantly in investment grade-rated counterparties.
- FFO fixed charge cover above 4.0x unaided by favourable interest carry.
- Evidence of sustained positive FCF generation.
Negative pressure on the ratings would occur if Intralot met most of the following rating factors on a sustained basis:
- Evidence that new contracts or renewals are occurring at materially more onerous conditions for Intralot, such as lower margins, large upfront concession fees or capex outlays.
- FFO-based net lease adjusted leverage permanently above 3.5x.
- FFO fixed charge cover below 2.0x.