Light & Wonder Earns ‘BB’ Credit Grade in Initial Fitch Rating

Light & Wonder (NASDAQ:SGMS), the company formerly known as Scientific Games, earned a “BB” credit mark in its first grade from Fitch Ratings, putting the slot machine manufacturer in non-investment grade territory.

The company reported a debt of $8.8 billion as of September 30, 2021. That’s well in excess of its market capitalization of $5.68 billion as of April 1.

The company’s ‘BB(EXP)’ rating reflects its improved credit profile pro forma for the planned debt paydown with proceeds from the sale of its lottery and sports betting segments,” says Fitch Ratings. “Gross leverage is expected to decline to the low-3x range with FCF margin sustaining in the high-teens percent, both solid for a gaming supplier and mobile developer.”

Before rebranding as Light & Wonder, Scientific Games announced multiple transactions to reduce its debt burden.

The company is generating proceeds of more than $7.2 billion by selling its OpenBet sports betting business and its SG Lottery unit. Endeavor Group Holdings, Inc. (NYSE:EDR), the parent company of the Ultimate Fighting Championship (UFC), said late last September it’s acquiring OpenBet for $1.2 billion in cash and stock. Last October, Brookfield Business Partners LP (NYSE:BBU) announced it’s purchasing SG Lottery for up to $6.05 billion.

Light & Wonder Metamorphosis

Disposing of the aforementioned lottery business removes a profitable, cash-generating enterprise from the Light & Wonder equation. But analysts mostly favor the move as will go a long way toward reducing leveraging and firming the company’s balance sheet.

“The company’s digital adjacencies balance the traditional slot industry’s high competitiveness, tepid replacement cycle, and unreliable new casino opening schedule,” adds Fitch. “The company’s leading slot systems business (~10 percent of pro forma revenues) provides a relatively reliable cash stream and its table game business (~9 percent) is shifting more toward a lease model with operators.”

The research firm notes Light & Wonder’s social gaming business drove more than $50 million in earnings before interest, taxes, depreciation and amortization (EBITDA) last year, up from just $10 million in 2015.

Cash Flow Potential

Fitch highlights Light & Wonder’s potential to generate robust levels of free cash flow (FCF) — an enviable trait when investors prioritize companies with such capabilities.

Strong FCF Generation: Fitch expects the company’s FCF generation and margin will reach $500 million and 15%, respectively, by 2023 thanks to fully recovered EBITDA, reduced interest expense, and reduced capital intensity following lottery’s divestiture, concludes the research firm. “FCF is strong relative to the broader gaming industry and in line with other ‘BB’ and ‘BBB’ category suppliers.”

If Light & Wonder can sustain leverage below 3x, show stability in digital gaming market share, and hold or expand upon current slot share, it could be positioned for a credit upgrade.