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Rating Action:

Moody's assigns Ba2 CFR to Playtech PLC; stable outlook

01 Oct 2018

Moody's assigns Ba2 rating to the €530 million senior secured notes

London, 01 October 2018 -- Moody's Investors Service (Moody's) has today assigned a Ba2 corporate family rating (CFR) and a Ba2-PD probability of default rating (PDR) to the global technology leader for the gambling and financial trading industries Playtech PLC ("Playtech" or the "company"). Concurrently, Moody's has assigned Ba2 rating to the €530 million senior secured notes to be issued by Playtech. The outlook on all ratings is stable.

The proceeds from notes, together with €428 million of balance sheet cash will be used to redeem Snaitech S.p.A. ("Snaitech")'s outstanding bonds, to repay the €412 million bridge loan, and to pay the transaction fees. The bridge loans, including a €250 million senior secured revolving credit facility due April 2021, were put in place in April 2018 to fund Snaitech's acquisition, which completed on 5 June 2018. At closing of this refinancing transaction, Moody's expects Playtech to have approximately €202 million of available cash and the RCF entirely undrawn.

This is the first time Moody's has assigned ratings to Playtech.

The list of newly assigned ratings is included at the end of this press release.

RATINGS RATIONALE

The Ba2 rating assigned to Playtech reflects (1) its position as established global technological operator in the online gaming software market; (2) the medium term contracts and entrenched relationships particularly with the largest customers within B2B gambling, albeit some uncertainty on the contract terms with GVC Ladbrokes Coral due 2021; (3) positive fundamentals underpinning the online gambling and financial trading industries; (4) the historic strong organic growth of Playtech stand-alone albeit this has decelerated in 2017 and became negative in 2018 mainly to changes in the market conditions in Malaysia and China and weak performance of B2C gambling; (5) the high level of cash generated from operations which has been used either to distribute special dividends or pursue the company's acquisition strategy, and (6) the moderate pro forma gross leverage (as adjusted by Moody's) of 2.4x close but likely to increase at the end of 2018 as a result of the weakened trading.

The recent acquisition of Snaitech has improved Playtech's business profile in terms of scale and geographic diversity. Snaitech, one of the largest Italian gaming company, will add approximately €890 million of revenue and €150 million of EBITDA to the group and it will increase its presence in regulated jurisdictions to 82% from 69% of total revenue. Playtech intends to use its online gambling and omni-channel expertise and capabilities to take advantage of the under penetrated Italian online gambling market in order to boost Snaitech's revenue in addition to the estimated €10 million cost synergies to be achieved over the period 2019-2022. Only 20% of Snaitech's contribution margin is currently derived from the faster growing online segment.

However, in Moody's view, this strategic acquisition has increased the operating risk of the group (similarly to Playtech's diversification into the financial trading industry since 2015). Snaitech, which is mainly exposed to the mature gaming machines and retail betting market segments, displayed a more volatile performance in the historical period due to ongoing tax increases, unfavorable regulatory changes and periods of high sports betting pay-out ratios leading to some market share losses. Despite a stronger performance in most recent trading, the company will continue to face an evolving regulatory framework, which is progressively introducing stricter measures to address gambling addiction (e.g. advertising ban, restrictions on opening hours) in addition to steady tax increases on gaming machines from September 2018. Although expected to be minor, Snaitech will also be impacted in the near term by the 35% reduction of its AWP installed base which was completed in April 2018. These measures are likely to offset some of the synergies expected to be achieved with the acquisition and decelerate prospective growth of the group. Snaitech will also reduce Playtech's profitability with its EBITDA margin expected to decline to approximately 25% from 34% and exposes the group to the risk of losing existing Italian customers which compete with Snaitech.

The rating also takes into consideration (1) the high degree of customer concentration (5 largest customers account for 38% of B2B gambling) and some exposure unregulated markets within the gambling division, albeit this has diluted with Snaitech and recent headwinds underpinning the Asian operations; (2) the fact that the group operates in a highly competitive operative environment, as evidenced by the recent events in China, where new players or technologies as well as consolidation and in sourcing trends represent a threat to Playtech's business model; (3) the risk of substantial losses in the financial trading division as a result of extreme market movements, partially mitigated by the risk management processes; and (4) threat for more stringent regulatory requirements in both gambling (particularly in key markets such as Italy and the UK) and financial trading (following ESMA's adoption of MiFid2 guidelines in August 2018).

LIQUIDITY

Moody's considers Playtech's liquidity position to be good for its near term requirements. This is supported by (1) available cash on balance sheet of at least €202 million at close, a (2) full availability under its €250 million RCF maturing April 2021, and (3) from continued high levels of operating cash flow. These sources are sufficient to cover capital expenditures of €120-130 million per annum, the €60 million cost to renew the sports betting rights in Italy likely to occurred in 2019, and shareholders' distributions. Additionally, the group has €180 million earn-out liabilities due the over the next three years and €297 million convertible bonds, currently out of the money, maturing November 2019. The latter will likely be refinanced with cash from operations and debt. Potential small bolt-on acquisitions will have to be funded with additional drawings of the RCF or other debt.

The RCF has two financial maintenance covenants to be tested on a quarterly basis, which are a maximum leverage ratio of 3.25x (stepping down to 3.1x in October 2019) and minimum interest cover ratio of 4.0x. Moody's anticipates large headroom under these covenants in the next 12-18 months.

STRUCTURAL CONSIDERATIONS

The CFR has been assigned to Playtech PLC, the top entity of the restricted group and the issuer of the notes. Using Moody's Loss Given Default (LGD) methodology, the Ba2-PD PDR rating is aligned to the Ba2 CFR. This is based on a 50% recovery rate, as is typical for transactions including both bonds and bank debt. The Ba2 instrument rating assigned to the €530 million SSNs is in line with the CFR under the assumption that the €297 million convertible bonds due November 2019 will be granted the same security and rank pari passu with the notes.

Both the notes and the RCF rank pari passu and are secured mainly against share pledges of certain companies of the group. As at June 2018, the notes benefit from the guarantees of subsidiaries representing, together with the issuer, 150% of consolidated EBITDA and 42% of total net assets. The RCF is guaranteed by material subsidiaries representing at least 75% of consolidated EBITDA and 55% of gross assets.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook assumes that Playtech will maintain Moody's adjusted leverage below 3.0x over time as well as a cash cushion, and will be able to adapt to further adverse regulatory changes in the gambling or financial trading industries with no material customer or volume losses. The stable outlook also incorporates the assumptions that the group will continue to make bolt-on acquisitions and distribute dividends maintaining a prudent capital structure.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure on the ratings is unlikely in the near term due to the high uncertainty of the market conditions. However, it could develop if Playtech can successfully adapt to the changes in the operating environment by sustaining revenue and EBITDA growth, demonstrates stabilization of its Asian operations and recovery in the casual games and Sun Bingo, maintains its profitability measured as EBITDA margin at around 25%, as well as positive free cash flow generation. Quantitatively, positive pressure could occur if Moody's-adjusted debt/EBITDA falls towards 2.0x, FCF/Debt stays above 10%, while maintaining good liquidity.

Conversely, negative pressure on the ratings could arise if (1) the Moody's-adjusted debt/EBITDA moves towards 3.5x on a sustained basis; (2) its free cash generation and liquidity profile weaken; and (3) its profitability deteriorates owing to competitive, regulatory and fiscal pressure or an inability to integrate acquired businesses. A more aggressive financial policy including large-scale debt-funded acquisitions which significantly increase leverage would be likely to cause negative rating pressure.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Assignments:

..Issuer: Playtech Plc

.... Corporate Family Rating, Assigned Ba2

.... Probability of Default Rating, Assigned Ba2-PD

....Backed Senior Secured Regular Bond/Debenture, Assigned Ba2

Outlook Actions:

..Issuer: Playtech Plc

....Outlook, Assigned Stable

Headquartered in the Isle of Man, Playtech is a leading technology company in the gambling and financial trading industries and the world largest online gambling software and services supplier, employing over 5,800 people across 17 offices, of which 1,800 are developers. Playtech was founded by Israeli entrepreneur Teddy Sagi in 1999 and has grown through a combination of organic growth and acquisitions. It is currently listed on the London Stock Exchange with a market capitalisation of approximately GBP1.5 billion. In the last twelve months to June 2018, the group, pro forma for Snaitech, generated €1,657 million of revenue and €438 million of EBITDA (€436 million on a Moody's adjusted basis).

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Donatella Maso
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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