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Rating Action:

Moody's assigns B2 CFR to Löwen Play

30 Jan 2014

Frankfurt am Main, January 30, 2014 -- Moody's Investors Service, ("Moody's") has today assigned a B2 CFR and a B1-PD Probability of Default rating to Safari Holding GmbH, the parent company of the Löwen Play Group and guarantor of the notes. At the same time we assigned a provisional (P)B2 rating to Safari Holding Verwaltungs GmbH's (Löwen Play) proposed senior secured guaranteed EUR265 million notes. The outlook on the ratings is stable.

The (P)B2 rating assigned to the notes is based on a review of draft documentation. Definitive ratings will be assigned upon a satisfactory review of final documentation and upon the successful close of the transaction.

RATINGS RATIONALE

The B2 CFR primarily reflects (1) Löwen Play's small size and lack of international diversification; (2) the material regulatory risk following the regulatory overhaul of the German gaming industry, which could have a material negative effect on Löwen Play's business model from July 2017 onwards; and (3) the key personal risk especially in the context of the regulatory threat.

However, the rating benefits from (1) Löwen Play's leading market position in the fragmented German gaming arcades market, supported by a strong network of arcades in affluent states (mainly Bavaria and Baden Württemberg); (2) the group's strong profitability in the context of the European gaming universe (based on EBIT margins); (3) the strong demand prospects for the German gaming market supported by sound macroeconomic conditions, especially in Löwen Play's key local states; (4) Löwen Play's good cash conversion supported by strong operating margins, a negative working capital consumption (players pay cash while Löwen Play pays its suppliers within 180 days on average) and an acceptable leverage pro-forma of the refinancing with adjusted debt/EBITDA of around 4.0x; (5) the group's very experienced management, which is critical at a time when the German gaming industry is undergoing a material regulatory overhaul; and (6) the company's ability to reduce costs in case of a credit negative regulatory change by July 2017 thanks to short-term gaming machines rental contracts (3 years) and around two-thirds of the group's real estate lease contracts open for renegotiation before 2017.

Liquidity

The liquidity profile of Löwen Play pro-forma of the transaction will be adequate. The company is expected to have around EUR40 million of cash on balance sheet at closing of the transaction. Given the cash flow generative nature of the business and the negative working capital consumption (customers pay immediately whilst suppliers are paid within 180 days), we expect that the company will rapidly build up a comfortable cash buffer. The group will also have access to a three-year, EUR15 million facility, provided by Ardian. At close, the facility will be fully drawn to cover EUR4.7 million of guarantees and EUR10.3 million as available liquidity for working capital and general corporate purposes. The company intends to put in place bilateral lines which would be used repay the facility.

Löwen Play will not face any material debt maturities over the next three years before the EUR15 million credit facility from its shareholder will come due. The proposed EUR265 million of senior secured guaranteed notes will mature in 2020.

Löwen Play will not need to comply with any maintenance covenants neither in the proposed senior secured guaranteed notes nor in the EUR15 million credit facility from its shareholder.

Under the notes indenture, Löwen Play will not be allowed to pay out a dividend until 2017. At that time, the company will only be allowed to pay a dividend if leverage is equal to or less than 1.5x. Further the company has committed to making a mandatory offer for up to 10% of its originally issued notes subject to maintaining adequate cash liquidity.

Structural considerations

The capital structure of Löwen Play post successful placement of the notes will be straightforward. There will be only three financial instruments in the capital structure:

• EUR265 million senior secured guaranteed notes

• EUR15 million 3-year term loan provided by Ardian, the owner of Löwen Play

From a contractual and structural point of view the senior secured guaranteed notes will have priority over the Ardian loan. The security package of the notes will consist of a pledge of shares of the guarantors and a security interest over receivables of the parent guarantor and the issuer, including receivables arising under the Profit and Loss Pooling Agreements and other intercompany receivables.

The differentiation between the probability of default rating and the corporate family rating reflects the all bond capital structure where Moody's assumes a lower recovery rate of 35%.

Rating Outlook

The stable outlook assumes an adjusted pro forma leverage of around 4.0x at the closing of the transaction with a gradual deleveraging on a net basis. The current rating also assumes that Löwen Play will maintain conservative financial policies, especially in light of the regulatory risk the company faces from July 2017 onwards.

What Could Change the Rating -- Up and Down

Positive rating pressure is not anticipated in the short to medium term due to the pending regulatory risk. Positive rating pressure would however build if (i) Net debt / EBITDA would drop sustainably and well below 3.0x; (ii)EBIT/Net interest expense would increase sustainably and well above 3.0x, (iii) Löwen Play would generate consistent positive free cash flow. A more benign change in the regulatory environment could also lead to upward rating pressure.

Negative rating pressure would be exerted on the rating if (i) Net debt / EBITDA moves sustainably above 4.5x, (ii) EBIT/Net interest expense drops sustainably below 2.0x, (iii) Löwen Play generates negative free cash flow. A more aggressive regulatory change than currently anticipated by management (especially the non availability of hardship clauses) could also lead to negative pressure on the rating.

The principal methodology used in these ratings was the Global Gaming published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Safari Holding GmbH is the parent entity of the Löwen Play Group and the guarantor of the proposed new notes. The Löwen Play Group is majority owned by AXA LBO Funds. The remaining shares are owned by management and Cofima, a Luxembourg-based holding company controlled by a Dutch entrepreneur.

Löwen Play is Germany's largest operator of coin gaming arcades by number of arcades, in a very fragmented market. The company operates 316 amusement arcades and 20 single sites/pubs. Löwen Play operates 8502 slot machines and 1124 amusement machines. Löwen Play reported revenues of EUR222 million and EBITDA of EUR92 million (41% margin) notwithstanding that the company capitalises its gaming machines rental costs (approximately 32% EBITDA margin when adjusted for the machines' rental costs).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stanislas Duquesnoy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B2 CFR to Löwen Play
No Related Data.
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