DraftKings Lands Junk Credit Rating from Fitch

Posted on: February 20, 2025, 12:18h. 

Last updated on: February 20, 2025, 12:50h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.
  • Fitch’s first rating on DraftKings is one level into the junk tier
  • Rating comes after company said it’s trying to land a $500M term loan

DraftKings’ (NASDAQ: DKNG) first report card from Fitch Ratings is in, with the ratings agency applying a junk grade to the online sportsbook giant.

DraftKings
A DraftKings logo. Fitch Ratings graded the gaming company at one notch into junk territory. (Image: DraftKings Sportsbook)

In a new report, Fitch announced it is rating DraftKings “BB+” with a “stable” outlook. That grade is one notch into junk territory. The research firm applies “BBB-“ rating with a Recovery Rating of “RR1” to unsecured debt issued by the gaming company. That’s the lowest investment-grade mark.

The ‘BB+’ issuer default rating (IDR) reflects the company’s leading market position in a growing industry, conservative financial structure, and robust free cash flow profile,” observes Fitch. “This is offset by limited diversification and heavy exposure to the volatile online sports betting (OSB) segment, along with a highly competitive online gaming industry (both iGaming and sports betting).”

Fitch’s rating on DraftKings coincided with the company telling investors it formed a consortium for a proposed senior secured term loan B credit facility of $500 million.

Loan Not a Strain on DraftKings’ Finances

Sports wagering, even in the online iteration in which DraftKings is one of the dominant players, is a capital-intensive business, but DraftKings’ balance sheet is sturdy. The operator had cash and cash equivalents of $788.28 million at the end of last year with modest outstanding liabilities.

Fitch noted the gaming company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) and revenue are rising and strong free cash flow generation could pave the way for the operator to pay down in 2027 the $1.15 billion in convertible notes it issued in March 2021. Those bonds, which can be converted to DraftKings common stock, come due in 2028.

Reducing or eliminating the convertible obligation would pare DraftKings’ leverage while mitigating a potential headwind because those notes carry “an initial conversion price of approximately $94.85 per share,” or nearly double where the stock currently resides. Although it rates DraftKings junk, Fitch is mostly bullish in its view of the operator.

“Fitch forecasts DraftKings’ revenue will grow 36% in 2025, followed by high single-digit growth, assuming no new online betting legalizations under the base case,” adds the ratings agency. “Revenue growth is expected to be driven primarily by normalization in hold, higher revenue per user, and increased parlay utilization. Fitch also believes DKNG’s active user growth will improve as existing jurisdictions continue to expand and DraftKings cross markets to Jackpocket users. These growth levers result in high flow through to EBITDA, driving margin expansion.”

DraftKings’ Balance Sheet Benefits

Even with the outstanding convertible issue and the $500 million term loan, DraftKings’ balance sheet compares favorably with those of some rivals. Some gaming companies spent mightily to gain traction in the US sports wagering industry only to fall well short of cracking the duopoly of DraftKings and Flutter Entertainment’s (NYSE: FLUT) FanDuel.

We anticipate DraftKings’ leverage to remain modest, benefiting from minimal debt exposure and robust cash generation, which supports its strategic initiatives,” says Fitch. “This financial strength contrasts with some peers, allowing DraftKings to invest heavily in marketing and innovation to maintain its competitive advantage in a dynamic and evolving industry landscape.”

Fitch’s “BB+” rating on DraftKings is one notch below the grade the research firm assigns to Flutter and one level about its grade on BetMGM.