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Rating Action:

Moody's places the ratings of Scientific Games International under review for upgrade

29 Oct 2021

New York, October 29, 2021 -- Moody's Investors Service ("Moody's") placed the ratings of Scientific Games International, Inc. ("Scientific Games" or "SGI") under review for upgrade, including the company's B3 Corporate Family Rating ("CFR"), B3-PD Probability of Default Rating, B1 rated senior secured facilities and senior secured notes, and Caa2 rated senior unsecured notes. The company's Speculative Grade Liquidity rating remains SGL-2.

On October 27, 2021 Scientific Games announced [1] it has entered into a definitive agreement to sell its Lottery business to Brookfield Business Partners L.P. for total consideration of $6.05 billion, consisting of $5.825 billion of cash and an earn-out of up to $225 million. The transaction is expected to close in calendar Q2 2022 and is subject to applicable regulatory approvals.

Moody's review will focus on the level of debt reduction, which is expected to be significant, and the company's go-forward capital structure following the sale of the Lottery business and the previously announced sale of the company's Sports Betting business. Total gross proceeds from the sale of the Lottery and Sports Betting businesses are over $7 billion. The review will additionally focus on assessing the continued recovery and trajectory of the company's gaming operations, including gaming, igaming, and SciPlay business, balanced by the reduction of scale, diversification, and distribution following the sale of the Lottery and Sports Betting businesses. Moody's estimates that gross debt-to-EBITDA could be under the 6.0x debt-to-EBITDA potential upgrade factor with only a partial debt repayment from the sale of the Lottery and Sports Betting businesses. The divestitures follow from the company's strategic review earlier in 2021 that included plans to meaningfully reduce leverage. Moody's will assess in its review how the company plans to utilize the divestiture proceeds to realize this goal including through debt reduction and reinvestment through organic development and acquisitions.

Scientific Games' decision to divest the Lottery and Sports Betting businesses will leave the company with Gaming, iGaming, and SciPay businesses, enabling the company to focus on its land-based and digital markets which have a large total addressable market and opportunity for growth. Moody's expects the company to focus on content franchises utilizing a cross-platform gaming approach, leveraging content creation investments and enabling player trends.

The following ratings/assessments are affected by today's action:

On Review for Upgrade:

..Issuer: Scientific Games International, Inc.

.... Corporate Family Rating, Placed on Review for Upgrade, currently B3

.... Probability of Default Rating, Placed on Review for Upgrade, currently B3-PD

....Senior Secured Term Loan B5, Placed on Review for Upgrade, currently B1 (LGD3)

....Gtd Senior Secured Multi Currency Revolving Credit Facility, Placed on Review for Upgrade, currently B1 (LGD3)

....Gtd Senior Secured Revolving Credit Facility, Placed on Review for Upgrade, currently B1 (LGD3)

....Gtd Senior Secured Global Notes, Placed on Review for Upgrade, currently B1 (LGD3)

....Senior Unsecured Notes, Placed on Review for Upgrade, currently Caa2 (LGD5)

....Gtd Senior Unsecured Global Notes, Placed on Review for Upgrade, currently Caa2 (LGD5)

Outlook Actions:

..Issuer: Scientific Games International, Inc.

....Outlook, Changed To Rating Under Review From Stable

RATINGS RATIONALE/FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Scientific Games' existing B3 CFR reflects the meaningful revenue and earnings decline from efforts to contain the coronavirus and the potential for an uneven recovery as its gaming customers' properties have reopened. The rating also considers the company's significant debt-to-EBITDA leverage level, which Moody's anticipates will remain above 8x at year end 2021 before considering the Lottery and Sports Betting divestiture effect. Another key credit concern is the relatively flat outlook for slot machine demand in the US, with the company's new games and cabinets looking to help drive performance in the Gaming operating segment. Revenues are largely tied to the volume of gaming machine play, gaming machine sales, and lotteries. Positive rating consideration is given to SGI's large recurring revenue base during normal operational periods. The company is also well positioned to benefit from the growth of digital gaming products, as the market continue to expand and mature. SGI currently owns a large portfolio of complementary gaming products and services, both digital and non-digital, that it can utilize and cross-sell globally among its various distribution platforms.

The company's speculative-grade liquidity rating of SGL-2 reflects good liquidity and a growing and sizable cash balance built in part through continued positive free cash flow. SGI has amended its credit facility and covenant levels providing covenant relief through year end 2021. The company is subject to a minimum liquidity covenant throughout 2021 of $275 million with which Moody's believes the company will remain in compliance. As of June 30, 2021, SGI had unrestricted cash of $932 million and $353 million of availability on its $650 million revolving credit facility. In July 2021 the company repaid another $150 million on the revolver. Moody's anticipates the company will continue to repay amounts outstanding on its revolving credit facility. Moody's estimates the company could maintain sufficient internal cash sources after maintenance capital expenditures to meet required annual term loan amortization of approximately $44 million and interest requirements over the next twelve-month period.

The coronavirus outbreak and the government measures put in place to contain it continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, the recovery is tenuous, and continuation will be closely tied to containment of the virus. As a result, a degree of uncertainty around our forecasts remains. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The gaming sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, Scientific Games remains vulnerable to a renewed spread of the outbreak. Scientific Games also remains exposed to discretionary consumer spending that leave it vulnerable to shifts in market sentiment in these unprecedented operating conditions.

Governance risk are elevated because the company's aggressive financial policy including acquisitions is contributing to very high leverage. Moody's believes the company will focus on debt repayment over the next year to help reduce leverage.

Ratings could be downgraded if liquidity deteriorates or if Moody's anticipates Scientific Games' earnings recovery will be more prolonged or weaker than expected because of actions to contain the spread of the virus or reductions in discretionary consumer spending.

The ratings could be upgraded if customer facilities remain open and earnings recover such that the company maintains positive free cash flow and reinvestment flexibility. Debt-to-EBITDA sustained near 6.0x through improved earnings, debt reduction, or application of divestiture proceeds is also necessary for an upgrade.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Scientific Games is a developer of technology-based products and services and associated content for worldwide gaming, lottery, social and digital gaming markets. Scientific Games Corporation (NASDAQ:SGMS) is the publicly traded parent company of Scientific Games International, Inc., the direct borrower of over $8 billion of rated debt. Consolidated revenue for the latest 12-month period ended June 30, 2021 was $3.07 billion and would be approximately $1.9 billion pro-forma for the agreed Lottery and Sports Betting divestitures.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Scientific Games Corporation press release dated October 27, 2021

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.

Adam McLaren
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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