Fitch Ratings Inc says the digital segment provides casino equipment and online games provider Light & Wonder Inc (L&W) “increased product diversification and scale,” which helps to “balance” the more competitive traditional slot-machine business.
The ratings agency said in a Monday note that it expects the gaming supplier to “pursue more casual mobile gaming” development as an “avenue for revenue growth”.
Fitch has assigned a final issuer default rating of ‘BB’ to Light & Wonder Inc. The rating outlook was stable, it said.
“Light & Wonder’s rating reflects its conservative leverage profile and solid expected free-cash-flow margin for a gaming supplier and mobile developer,” stated the ratings agency.
Despite Light & Wonder’s gross leverage “declining slower than anticipated”, Fitch believes the firm’s credit profile remains consistent with ‘BB’, due to robust free cash flow generation, strong liquidity, and still conservative leverage.”
Fitch ‘BB’ ratings indicate “an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time,” though the institution notes that for that rating, “business or financial flexibility exists that supports the servicing of financial commitments”.
Light & Wonder reported in November revenue of US$648 million for the third quarter, up 20.2 percent from a year earlier. Such growth was driven by “continued strong momentum” across the group’s gaming and iGaming segments, and “record revenue” at digital business SciPlay, the company said at the time.
During the reporting period, Light & Wonder completed the sale of the group’s sports betting business, OpenBet, to Endeavor Group Holdings Inc, involving total gross proceeds of approximately US$800 million. In April, the group finalised the sale of its lottery business.
“Pro forma for the lottery and sports betting dispositions, Light & Wonder is still a diversified gaming supplier with exposure to traditional gaming (slots, tables, systems), iGaming, social gaming and casual mobile gaming,” noted Fitch.
It added: “The company’s digital adjacencies balance the traditional slot industry’s high competitiveness, tepid replacement cycle, and unreliable new casino opening schedule.”
According to Monday’s memo, Light & Wonder’s digital business “tends to be hit driven and competitive, especially within social gaming”. That business segment also requires “considerable research and development investment and customer acquisition costs”.
Fitch added: “These factors may cause operating cashflows to be more volatile than the traditional slot business; however, digital provides the company increased product diversification and scale.”
The institution estimates Light & Wonder’s “gross leverage to be 4.2 times” by year-end 2022 and “will improve toward the high-3.0 times in fiscal 2023” as the company’s “gaming segment’s earnings before interest, taxation, depreciation and amortisation fully recovers (specifically equipment and systems adjacencies).”
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