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Rating Action:

Moody's downgrades Codere to B3; stable outlook

11 Sep 2019

Paris, September 11, 2019 -- Moody's Investors Service ("Moody's") has today downgraded the Corporate Family Rating (CFR) of Codere S.A. ("Codere" or "the company") to B3 from B2 and the probability of default rating (PDR) to B3-PD from B2-PD. Concurrently, Moody's has also downgraded the ratings of Codere Finance 2 (Luxembourg) S.A.'s USD300 million senior notes and the EUR500 million senior notes both due in November 2021 to B3 from B2. The ratings outlook is stable.

"Today's rating action reflects Codere's lack of top line revenue growth, lower operating performance than previously forecast by Moody's and sustained negative free cash flow, which Moody's projects will remain negative for at least the next 12 months and could pressure future liquidity. Codere is also materially exposed to the unstable macroeconomic and political environment in Argentina, as reflected by Moody's recent downgrade of the sovereign rating and the country ceiling" says Laura Kaliszewski, Moody's lead analyst for Codere.

"Furthermore, there are a number of licenses, which are up for renewal in Argentina in the next couple of years and increased uncertainty pertaining to the presidential elections in October. Moody's considers that a newly elected government could enforce materially adverse regulations and taxation changes, which could further weigh on Codere's profitability and liquidity", adds Ms. Kaliszewski.

RATINGS RATIONALE

Codere's operating performance and cash flow generation were below Moody's expectations for 2018 and Moody's expects these will remain under pressure over the next 12-18 months. Codere's revenues and adjusted EBITDA (as calculated by Moody's) both declined around 10% compared with 2017, contrary to Moody's expectations of stable revenues and earnings. Revenues primarily fell due to the company's Argentinian business on account of unfavorable foreign exchange movements, while Codere's Moody's adjusted EBITDA was negatively affected by the application of hyperinflationary accounting (IAS 29) in Argentina as well as significant charges incurred, relating to operational efficiencies and personnel restructuring. These significant charges, which Codere reports as non-recurring items (excluding acquisition costs) increased to EUR42.7 million in 2018 from EUR26.8 million in 2017 and represents one of the key differences between adjusted EBITDA as calculated by Moody's, and EBITDA as calculated by the company.

Weaker profitability and still high capex also meant that free cash flow (FCF) as calculated by Moody's remained negative in 2018. This negative FCF contributed to a decrease in overall liquidity to around EUR82 million in 2018 from EUR104 million in 2017. Codere's Moody's gross adjusted debt/EBITDA also deteriorated to 3.8x as of the end of 2018 from 3.5x in 2017.

Moody's had expected FCF to turn positive in 2019 and for liquidity to strengthen. However, Moody's forecasts that Codere's operating performance and cash flow will continue to face pressure over the next 12-18 months, including still material charges related to litigations and online marketing expenses. As a result, Moody's expected negative FCF could further weaken liquidity.

In addition, Moody's expects the unstable macroeconomic and political environment in Argentina (Government of Argentina, Caa2 Rating Under Review for downgrade) will cause further volatility in Codere's operating performance and FCF generation. As Argentina wades through its prolonged currency crisis, Moody's expects high and volatile inflation as well as high interest rates to act as a drag on domestic demand for the rest of 2019. Furthermore, as a presidential election looms, Moody's expects there could be increased financial and exchange rate volatility. In 2018 the Argentine peso devalued 75.2% against the Euro, leading to a 30% decline in Codere's revenue in Argentina vs. 2017 on a current foreign exchange basis. This was despite an 18% increase on a constant currency basis.

Codere remains exposed to ongoing regulatory and taxation headwinds inherent to the gaming industry. Moody's considers there to be heightened uncertainty around fiscal and regulatory reforms in Argentina as a new government in the country, and the Buenos Aires province, could implement adverse policies and regulations impacting the gaming sector.

The Argentinian government's announcement on 1st September 2019 that it had introduced capital control measures also raises uncertainty around cash repatriation for Codere, though the precise implications of the government's pronouncements are unclear.

Beyond the next 12-18 months there are six licenses out of 13 licenses up for renewal in Argentina in 2021 and 2022. Moody's expects the successful renewal of these six licenses will likely require additional investment. Moody's understands these licenses represent approximately 10% of the company's EBITDA, which was EUR283 million in the last twelve months ended March 2019.

Nevertheless, in spite of downward pressures, Codere's rating remains supported by the company's position as one of the leading gaming operators in Spain and Latin America, with a degree of diversification in terms of gaming assets and geographies. Codere has demonstrated ability to mitigate currency and regulatory risks through cost efficiencies, targeted growth and maintaining the majority of its cash balances in USD and Euros. Moody's expects that Codere's gross adjusted leverage will increase to 4.0x at December 2019 versus 3.8x in December 2018 driven by weaker expected Moody's adjusted EBITDA in 2019 versus 2018 but that gross leverage levels will stay below 4.5x over the next 12- 18 months.

Codere's rating takes into consideration the company's corporate governance. Following the company's restructuring in 2016, the company underwent a major senior management change in 2018. The Codere President and Chief Executive Officer (CEO) and Co-Founder José Antonio Martínez Sampedro was replaced with Norman Sorensen as Non-Executive President and with Vicente di Loreto as Chief Executive Officer, who served in the past as Codere CEO for Argentina and as Chief Operating Officer (COO) for Latin America. This change of corporate structure has created an ongoing governance dispute between Codere's largest shareholders (including investment funds Silverpoint Capital and M&G, among others) and the company's founding Martínez Sampedro family, which still owns 18% of the company.

Social considerations are also taken into consideration in Codere's rating. Argentina and Italy have recently tightened gambling regulation mainly due to the increasing social awareness on problem gambling activities. Moody's expects that this trend, as well as potentially increasing taxation, will continue to be issues for this sector more generally.

LIQUIDITY PROFILE

Moody's considers Codere's liquidity is adequate. It is underpinned by: (1) EUR76 million of cash on balance sheet at the end of March 2019; (2) EUR77.8 million availability under the EUR95 million super senior revolving credit facility (RCF) as of March 2019; and (3) no significant debt maturities before November 2021. While Moody's believes that the refinancing risk is not elevated at this stage, continued negative FCF generation could make it more challenging to refinance the notes and could further constrain liquidity in the next 12 to 18 months.

STRUCTURAL CONSIDERATIONS

The B3 rating of the senior secured notes due 2021 is aligned with the CFR, reflecting Moody's assumption of a 50% family recovery rate, as is customary for capital structures with both bond and bank debt. The notes are secured by share pledges and benefit from upstream guarantees. The capital structure also includes a EUR95 million super senior RCF (unrated), which shares the same security and guarantees with the notes but ranks ahead of the notes upon enforcement.

RATING OUTLOOK

The stable outlook on Codere's ratings reflects Moody's expectation that the current macro-political environment in Argentina will constrain profitability, but that liquidity should remain sufficient to cover the company's operational and capex needs. The stable outlook also incorporates our expectation that FCF should become positive over time.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure is not expected at this stage but could develop over time if Codere's operating performance enables the company to improve its Moody's gross adjusted debt/EBITDA to below 3.5x on a sustainable basis and if Codere generates positive FCF on a sustained basis, which will strengthen liquidity.

Conversely, downward rating pressure could occur if Codere's Moody's gross adjusted debt/EBITDA sustainably increases towards 4.5x, as a result of a deterioration in operating performance or a change in financial policy. The ratings could also come under pressure if Codere's liquidity no longer adequately supports the company's operations or debt servicing.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Gaming Industry published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Madrid (Spain) and listed on the Madrid Stock Exchange, Codere is a multinational gaming operator that manages gaming machines, gaming machine halls, bingo halls, casinos, sports betting locations and horse racing tracks in Latin America, Italy and Spain. As of March 2019, Codere managed over 56,000 slot machines, 29,000 bingo seats and 8,400 sports betting terminals in Latin America, Spain and Italy across various gaming venues, including 148 gaming halls, 1,157 arcades, 9,898 bars, 478 sports betting shops and 4 horse racetracks. For the last twelve months (LTM) ending 31 March 2019, Codere generated operating revenue of EUR1.4 billion and EBITDA of EUR283 million (as reported by the company).

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Laura Kaliszewski
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Jeanine Arnold
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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