-- U.S. gaming services provider Scientific Games plans to issue
$250 million of senior subordinated notes due 2020.
-- We are assigning the notes our 'BB-' issue-level rating, with a
recovery rating of '5'.
-- The stable rating outlook reflects our expectation that credit
measures will remain at a level we believe is in line with the current rating.
On Aug. 15, 2012, Standard & Poor's Ratings Services assigned its issue-level
and recovery ratings to Scientific Games International Inc.'s proposed $250
million senior subordinated notes due 2020. The notes were rated 'BB-' (one
notch lower than the 'BB' corporate credit rating on parent company Scientific
Games Corp.) with a recovery rating of '5', indicating our expectation of
modest (10% to 30%) recovery for lenders in the event of a payment default.
Proceeds from the notes offering will be used to redeem or repurchase the $200
million 7.875% senior subordinated notes (including accrued interest and the
applicable redemption premium), and for general corporate purposes.
All existing ratings, including the 'BB' corporate credit rating on Scientific
Games Corp., are unchanged. The rating outlook is stable.
Our 'BB' corporate credit rating on Scientific Games reflects our assessment
of the company's financial risk profile as "aggressive" and its business risk
profile as "fair," according to our criteria.
Our assessment of its financial risk profile as aggressive reflects our
expectation that our measure of leverage will remain below 5x over the
intermediate term. It also reflects the company's substantial acquisition
activity and investments through joint ventures, its "adequate" liquidity
profile, and our expectation for interest coverage to track around 3x over the
Our assessment of Scientific Games' business risk profile as fair reflects
competitive market conditions in the lottery industry for contract renewals
and for new contracts, which often result in pricing pressure; the mature,
capital-intense nature of the lottery systems industry; and the company's
limited business diversity. Offsetting factors are Scientific Games'
leadership position in the instant ticket lottery segment of the gaming
industry, a diversified customer base, and substantial recurring revenue and
cash flow, given long-term contracts with renewal options that are typically
Our rating factors in the expectation that Scientific Games' revenue and
EBITDA will grow in the mid-single-digit percentage area in 2012. Our revenue
assumption incorporates an expectation for continued weakness in instant
ticket revenue, largely the result of a weak macroeconomic environment in
Italy. We are currently incorporating an expectation that declines continue at
the same level as the second quarter for the remainder of 2012. (Instant
ticket revenue declined 8.3% in the second quarter.) Our expectations for the
Italian instant ticket business are largely driven by our European economist's
baseline forecast for a 2.1% decline in GDP in 2012 and 0.4% decline in 2013
in Italy, and for unemployment to increase to 10% by the end of 2013. We are
factoring in high-single-digit revenue growth across Scientific Games' service
and sales revenue (excluding the acquisition of Barcrest). Our forecast also
factors in a modest level of incremental revenue associated with the company's
acquisition of Barcrest last year. Our performance expectations for the
company's lottery business factor in our U.S. economist's forecast for modest
consumer spending growth and changes in various lotteries, including the
Powerball price increase and the ability to sell some lottery products through
the Internet channel. We expect growth in the lottery segment in the remainder
of the year to be more moderate than first-quarter sales levels, which were
aided by strong jackpot activity. Additionally, we believe economic
uncertainty in many European markets could dampen international growth.
In addition to the revenue drivers above, our EBITDA forecast also factors in
an expectation for about $55 million in cash distributions from joint ventures
in 2012, slightly higher than distributions received in 2011. (We include
return of capital payments in our measure of cash distributions.) Under our
performance expectations, we believe leverage will remain in the high-4x area
in 2012, and that the company will continue to improve leverage in 2013,
building in additional cushion relative to the 5x maximum leverage threshold.
We view some cushion relative to our threshold as necessary to provide
Scientific Games with flexibility to pursue additional strategic growth
opportunities without meaningfully impairing its financial risk profile.
While revenue growth has somewhat exceeded our expectations in the first half
of the year, EBITDA has performed in line with our expectations. In the six
months ended June 30, 2012, Scientific Games' revenue increased 11%. EBITDA
(which we adjust to include cash distributions and return of capital payments
from joint ventures) increased about 6%. At June 30, 2012, leverage and
coverage were 4.8x and 2.9x, respectively.
Scientific Games is a leading integrated supplier of instant tickets, lottery
gaming systems and services, and server-based interactive gaming terminals and
systems to lottery and gaming organizations worldwide. While the company
remains a distant second in the lottery systems segment, behind industry
leader Lottomatica SpA, Scientific Games is the leader in the instant ticket
segment of the lottery industry, which has grown more rapidly in recent years.
Based on the company's likely sources and uses of cash over the next 12 to 18
months and incorporating our performance expectations, Scientific Games has an
adequate liquidity profile, according to our criteria. Relevant factors in our
assessment of Scientific Games' liquidity profile include the following:
-- We expect the company's sources of liquidity over this period to
exceed its uses by 1.2x or more.
-- We expect that net sources of liquidity would be positive, even if
forecasted EBITDA declined 15%.
-- We believe that Scientific Games has sufficient covenant headroom,
such that a 15% decline in forecasted EBITDA would not result in a breach of
-- We believe Scientific Games has a sound relationship with lenders and
a satisfactory standing in credit markets.
Liquidity sources include a $250 million revolving credit facility, a moderate
cash balance, and internally generated cash. As of June 30, 2012, the company
had approximately $212 million in availability under its revolving credit
facility (after accounting for letters of credit outstanding) and a cash
balance of $112 million.
In the 12 months ended June 30, 2012, Scientific Games generated about $157
million in cash flow from operations and spent about $98 million on capital
expenditures. We expect that operating cash flow generation in 2012 will be
sufficient to cover our expectations for around $150 million in capital
expenditures and that the company will generate a modest amount of free
operating cash flow (FOCF) that it could use for debt repayment, modest-sized
acquisitions, or possible additional strategic growth opportunities.
The company's credit facility includes several financial maintenance
covenants. The total leverage covenant is set at 5.75x through Dec. 31, 2013,
5.50x for all of 2014, and 5.25x thereafter. The senior leverage covenant is
set at 2.75x, and the interest coverage covenant is at 2.25x. Under our
forecast assumptions, the company maintains adequate cushion with respect to
these financial maintenance covenants.
The proposed $250 million senior subordinated notes offering, which will
refinance the company's $200 million senior subordinated notes due 2016,
improves Scientific Games' already strong debt maturity profile. Over the next
few years, debt maturities consist primarily of amortization payments under
the term loan until the company's term loan and revolver mature in June 2015.
Scientific Games has a $200 million share repurchase authorization in place
through the end of 2012, with roughly $172 million remaining as of June 30,
2012. While the company has built in some flexibility to complete a modest
level of share repurchases, we generally expect the company will use its
resources for growth opportunities as they arise and have not incorporated any
meaningful share repurchase activity.
Our rating outlook on Scientific Games is stable, reflecting our expectation
that credit measures will remain at a level we believe is in line with the
current rating. Furthermore, we expect the company will continue to gradually
improve its leverage profile over the next two years. This should allow
Scientific Games to build in some cushion relative to our 5x maximum leverage
threshold, which would provide it flexibility to make additional strategic
investments without meaningfully impairing its financial risk profile. For
2012, we have factored into our rating a mid-single-digit revenue and EBITDA
increase. Under our performance expectations, we expect leverage to be in the
high-4x area at the end of 2012 and EBITDA coverage of interest around 3x.
We could lower our rating if the company does not demonstrate organic growth
in its existing businesses or if the company embarks on larger-than-expected
investments for acquisitions or other strategic growth opportunities, such
that we no longer believe the company has the ability to maintain leverage
below 5x. A higher rating is unlikely over the next two years, given our
expectation that Scientific Games will pursue investment opportunities and
that leverage will remain in the mid- to high-4x area, on average.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Scientific Games Corp.
Corporate Credit Rating BB/Stable/--
Scientific Games International
$250 mil sr sub notes due 2020 BB-
Recovery Rating 5