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Rating Action:

Moody's assigns rating to Sci Games proposed $5.5 billion debt issue; existing ratings remain on review for downgrade

Global Credit Research - 03 Sep 2014

Approximately $9.0 billion of rated debt affected.

New York, September 03, 2014 -- Moody's Investors Service assigned the following ratings to Scientific Games Corporation's (SGMS) proposed $5.5 billion debt offering: $1.735 billion senior secured term loan due 2022 at Ba3; $750 million senior secured notes due 2021 at Ba3; $2.2 billion of senior unsecured notes due 2022 and $500 million of senior unsecured notes due 2024 at Caa1. At the time of closing, we expect the company's existing $300 million senior secured committed revolver expiring in 2018 will be increased to $650 million. Proceeds from this debt offering, borrowings under SGMS' revolver, and about $100 million of cash on hand will be used to fund SGMS' acquisition of Bally Technologies, Inc. (Bally, Ba3 on review for downgrade), repay substantially all of Bally's existing debt and pay related fees and expenses.

SGMS's existing ratings remain on review for downgrade. These rating include SGMS' B1 Corporate Family Rating, B1-PD Probability of Default Rating, $2.6 billion Ba3 senior secured bank facility rating, and $900 million B3 senior subordinated notes rating. This debt was placed on review for downgrade on August 1, 2014 following SGMS's announcement that it signed a definitive agreement to acquire the outstanding shares of Bally for $83.30 per share in cash, or a total transaction value of about $5.1 billion including the refinancing of approximately $1.8 billion of existing Bally net debt.

RATINGS RATIONALE

The ratings assigned to SGMS' proposed $5.5 billion debt issuance is based on the assumption that SGMS' Corporate Family Rating, currently at B1 on review for downgrade, will be lowered one-notch to B2 once the transaction closes. The expected closing date is early 2015 and remains subject to approval by Bally's stockholders, receipt of certain gaming regulatory approvals and other customary conditions.

The B2 Corporate Family Rating that we expect to take effect assuming the transaction closes as currently planned, considers SGMS' significant pro forma leverage, calculated both with and without management estimated cost synergies. Moody's calculates SGMS' pro forma debt/EBITDA at 6.7 times with estimated cost synergies and 8.0 times without estimated cost synergies. Despite Moody's expectation that SGMS will apply its annual free cash flow of between $400 million and $450 million over the next 24 months to permanently reduce debt outstanding, debt/EBITDA will still be considered high at about 6.5 times. Incorporated into Moody's 6.5 times debt/EBITDA estimate are the following assumptions for the next 24 month period: (1) the expectation of continued softness in the gaming sector and only a modest level of consolidated EBITDA growth; (2) 75% of the company's proposed $220 million of estimated cost synergies are achieved; (3) and between $400 million to $450 million of absolute debt repayment.

Notwithstanding these concerns, the acquisition of Bally makes strategic sense, given the complementary nature of the two companies' products, the enhanced scale, and the business and geographic diversity they would achieve. The combination would enhance scale in an increasingly competitive market and is a good strategic fit for SGMS as it will improve SGMS' offerings in the gaming industry in areas such as casino management systems and table products, including automatic shufflers, proprietary table games and electronic table games.

The expected stable rating outlook assumes SGMS' lottery segment (Instant Products and Lottery Systems) -- which will account for about 30% of 2014 pro forma revenue -- will continue to grow, albeit moderately. This should partly or fully mitigate potential volatility in SGMS' gaming business. The stable outlook also assumes that the company will apply the majority of its free cash flow to absolute debt reduction above and beyond any mandatory and cash flow sweep amortization requirements.

The ratings could be lowered if it appears that the company will not be able to reduce and maintain debt/EBITDA below 6.0 times by the end of calendar year 2016. The ratings could also be lowered if the terms of the transaction change prior to closing in a manner that Moody's believes will unfavorably impact SGMS' pro forma capital structure and/or financial profile for any reason. A higher rating would require SGMS to achieve and maintain debt/EBITDA below 5.0 times and maintain its good liquidity profile.

At the time of closing, and the one-notch downgrade to SGMS' Corporate Family Rating, we would expect the existing senior secured debt to remain at Ba3 -- due to the addition of a significant amount of new junior debt in the capital structure -- while the subordinated debt would be lower by one-notch.

Ratings assigned:

Scientific Games International, Inc.:

Proposed $1.735 billion senior secured term loan due 2022 at Ba3 (LGD2)

Proposed $750 million senior secured notes due 2021 at Ba3 (LGD2)

Proposed $2.2 billion senior unsecured notes due 2022 at Caa1 (LGD5)

Proposed $500 million senior unsecured notes due 2024 at Caa1 (LGD5)

Ratings remaining on review for downgrade:

Scientific Games Corporation:

Corporate Family Rating at B1

Probability of Default Rating at B1-PD

8.125% $250 million senior subordinated notes due 2018 at B3 (LGD5)

Scientific Games International, Inc.:

$300 million senior secured revolving credit facility due 2018 (will be increased to $650 million at closing of transaction) at Ba3 (LGD3)

$2.3 billion senior secured term loan B due 2020 at Ba3 (LGD3)

6.25% $300 million senior subordinated notes due 2020 at B3 (LGD5)

6.625% $350 million senior subordinated notes due 2021 at B3 (LGD5)

The principal methodology used in these ratings was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. 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.

Scientific Games Corporation is a developer of technology-based products and services and associated content for worldwide gaming and lottery markets, including instant and draw-based lottery games, electronic gaming machines and game content, server-based lottery and gaming systems, sports betting technology, loyalty and rewards programs and social interactive content and services. In October 2013 SGMS acquired WMS Industries Inc. which designs, manufactures and markets video and mechanical reel-spinning gaming machines, and video lottery terminals. The company reported pro forma net revenues (excluding Bally) of $1.6 billion for the trailing twelve months ended June 30, 2014.

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.

Peter Trombetta
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns rating to Sci Games proposed $5.5 billion debt issue; existing ratings remain on review for downgrade
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