(Repeat for additional subscribers)
April 25 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Intralot SA's (Intralot) Long-Term Issuer Default Rating (IDR) at 'B+' and revised the Outlook to Negative from Stable.
Fitch has also affirmed the EUR325m 9.75% Eurobond due in August 2018, issued by the company's wholly-owned entity Intralot Finance Luxembourg S.A. at 'BB-'and assigned Intralot's wholly-owned entity Intralot Capital Luxembourg SA's planned bond issue of EUR200m an expected senior unsecured rating of 'BB-'(EXP)'/RR3'. The final ratings for these bonds are contingent upon receipt of final documentation conforming to information already received by Fitch.
The new EUR200m 2021 senior unsecured (S/U) bond issue will repay around EUR147m of revolving credit facility (RCF) drawings and local loan debt, while EUR50m will be used as a cash buffer. The precise use of this EUR50m new cash has not been earmarked but can be used for capex, working capital or acquisition purposes. Fitch estimates that there could be a material negative carry back from low-earning large cash deposits in 2014, which could adversely affect credit metrics, notably fixed charge coverage (FCC) and funds from operations (FFO) gross and net leverage. The EUR200m S/U bond will maintain gross leverage between 4.5x and 5.0x in 2014, although net leverage will remain between 3.2x and 3.5x in 2014 and 2015. Fitch is focussing on the gross leverage ratio, as we have limited visibility regarding the excess cash available for debt service and this justifies the Negative Outlook.
KEY RATING DRIVERS
Senior Unsecured Ranking
The planned EUR200m 2021 bond will be issued by Intralot Capital 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 Intralot Global Securities BV and by the main operating subsidiaries of Intralot Global Securities B.V. These guarantors will account for approximately 65% 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 liquidation given the asset-light nature of Intralot's business. Fitch has applied a discount of 30% to Intralot's FY13 consolidated EUR192m 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 EUR537m. Taking into account the new debt structure including the EUR150m 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 around EUR147m of RCF and local loan debt, while aroundEUR50m will be used as a cash buffer. Together with around EUR146m of existing cash, Intralot should have sufficient liquidity to repay the remaining EUR80m term loan due in December 2014, should the term loan facility and the current RCF EUR150m facility not be refinanced. Intralot is also working to improve its liquidity by refinancing the existing EUR150m RCF facility and EUR80m term loan, which both mature in December 2014. Fitch understands that subject to documentation the company has received over EUR200m of commitments from their bank group for the refinancing of these credit facilities.
The ratings are premised on the successful issuance of the prospective notes, so that sufficient liquidity is available to repay the RCF and term loan debt maturing in December 2014.
Fitch would expect Intralot to raise at least EUR100m to retain sufficient liquidity.
Solid Operations, Higher Leverage
Leverage at end-2013 was higher than Fitch forecast due to higher interest costs, working capital requirements and tax paid. Fitch expects gross leverage to stay between 4.5x and 5.0x in 2014. Should Intralot make a profit accretive acquisition and/or repay debt, leverage could reduce back to a level commensurate with the 'B+' guideline.
Low Free Cash Flow
Free cash flow (FCF) should remain positive in 2014 due to a significant reduction of capex, but will be held back by increased working capital requirements and increased taxation in line with the expansion of the business.
A factor of cash flow absorption is linked to the significant proportion of EBITDA that does not belong to Intralot (although fully consolidated), linked to joint ventures. This resulted in approximately EUR17m of annual minority dividend distributions in 2013, which reduced FFO and ultimately FCF in 2013.
Solid Track Record
The 'B+' IDR reflects its established track record of winning and retaining high profile gaming contracts, steady EBITDA growth from its licensed operations division and a well- diversified contract portfolio. The ratings are however held back by the low credit quality of some of the countries in which the company operates, the important role and dividends paid to minorities, rising tax paid and the increasing working capital requirements of this expanding business.
Limited Linkage with Greece
Intralot generates only 5% of its revenues and less than 10% of its EBITDA in Greece. While its management and a major proportion of its software developers and machine designers are based in Greece, overall Greece-based employees only account for 15% of the total. As of YE13 less than 10% of group cash was lodged in Greece or Cyprus.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- Positive EBITDA growth derived from stronger return on capital on existing and future contracts with limited capex outlays.
- FFO-based net lease adjusted leverage reducing sustainably below 3.0x (FFO gross lease adjusted leverage below 4.0x), 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.
Future developments that may, individually or collectively, lead to a stabilisation of the rating Outlook include:
Positive EBITDA growth derived from stronger return on capital on existing and future contracts with limited capex outlays.
- FFO-based net lease adjusted leverage reducing sustainably below 3.5x (FFO gross lease adjusted leverage below 4.5x), with cash deposited predominantly in investment grade-rated counterparties.
- FFO fixed charge cover around 3.0x, unaided by favourable interest carry.
- Evidence of sustained positive FCF generation.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Evidence that new contracts or renewals are occurring at materially less favourable conditions for Intralot, such as lower margins, large upfront concession fees or capex outlays.
- FFO-based net lease adjusted leverage sustainably above 4.0x (FFO gross lease adjusted leverage above 5.0x).
- FFO fixed charge cover below 2.0x.
-Material reduction in liquidity without a commensurate reduction in gross leverage