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Rating Action:

Moody's upgrade the CFR rating of Entain plc to Ba1 from Ba2 with stable outlook

14 Apr 2022

London, April 14, 2022 -- Moody's Investors Service ("Moody's") has today upgraded to Ba1 from Ba2 Entain plc's ("Entain" or "the company") corporate family rating (CFR). Moody's has also upgraded to Ba1-PD from Ba2-PD the probability of default rating (PDR) and to Ba1 from Ba2 the rating on the GBP590 million senior secured revolving credit facility (RCF) due 2026 issued by Entain. Moody's has upgraded to Ba1 from Ba2 the senior secured term loan B3 (TLB3) and B4 (TLB4) due in 2024 and 2027 issued by Entain's subsidiary Entain Holdings (Gibraltar) Limited. The rating outlook for both entities remains stable.

"Entain's business model has demonstrated resilience during the Covid-19 pandemic, with growth on its on-line offer somewhat offsetting the drop in revenues from the retail betting shops. Entain's sharp rebound in 2021 with the retail re-opening and solid cash flow generation has led to credit metrics that positions it well in the Ba1 rating category", says Stefano Cavalleri Vice President ? Senior Analyst and lead analyst for Entain.

RATINGS RATIONALE

Today's upgrade reflects Moody's expectation that Entain will maintain leverage as measured by Debt to EBITDA below 3x in 2022 and that the same ratio will trend towards 2.5x in 2023. Entain will benefit from retail revenues returning to pre-pandemic levels over the next 12 months as well as continued growth in its on-line business. The action also takes into account a likely decline in online revenues from the UK in 2023 as a result of an expected tightening of the regulation as well as the expectation that the joint venture in the USA will break-even at EBITDA level in 2023. Moody's expects Entain to grow both organically and through acquisitions while adhering to a leverage target of 2x reported net debt to EBITDA.

The Ba1 CFR is supported by (1) Entain's business profile that has improved over time through a combination of targeted acquisitions, geographic diversification and organic growth; (2) the underlying positive trend in demand in the online gaming sector as well as the demonstrated ability to migrate part of its retail customers to online during the lock down period; (3) the size of the group with revenues set to well exceed GBP4 billion in 2022 while maintaining profitability and strong market share over the years; (4) the competitive advantage stemming from Entain's proprietary technology platform and customer relationship management system (CRM) combined with the company's online tools and pro-active approach to gambling safety (5) strong free cash flow generation, that remained positive in 2020 and 2021 and sufficient to cover the funding requirement of BetMGM JV, combined with demonstrated deleveraging.

Entain's rating, however, remains constrained by (1) the highly competitive nature of the online betting and gaming industry; (2) the highly acquisitive nature of the company, being a consolidation platform, that is unlikely to change in the near future; (3) the company's ability to cash on the growth in the US market through its JV and (4) the ongoing threat of greater regulation and gaming tax increases, particularly in the largest and most established European markets due to social pressure.

ESG CONSIDERATIONS

Entain has a highly negative exposure to social risks. Entain operates in jurisdictions where the gaming industry is subject to an evolving and tightening regulatory environment aimed at protecting players subject to gambling addiction issues as well as preventing money laundering. Although, gaming remains a popular source of entertainment, in the UK Entain faces growing social responsibility pressures, which could lead to tighter gaming regulations for online gaming as already seen in the UK retail segment and in Germany and the Netherlands. Entain's activities are largely online, which positions the company well in the context of changing consumer preferences from land-based gaming to online. Entain's exit from unregulated markets, pre-emptive stance on making betting safer, combined with its geographical diversification across Europe and rapid growth in the USA would help to mitigate its exposure to regulatory risk together with its focus on responsible gambling.

LIQUIDITY

Entain's liquidity position is good, evidenced by (1) material cash flow generation, a cash on balance sheet of £487 million (of which £206 million is from customer deposits); (2) an undrawn £590 million senior secured RCF with expiry in 2026. The next debt maturities relate to the 2022 and 2023 Ladbrokes notes which are likely to be repaid.

The senior secured RCF benefits from a springing covenant once drawn for at least 40%; the covenant level would is set at 6.0x with a stepdown to 5.0x after 2023, leaving plenty of headroom.

Capex are assumed to be largely non-discretionary and in the region of £200 million; MGM JV still requires material investments for 2022 but reducing significantly in 2023. Both capex and JV investments are well covered by internal cash flow generation.

STRUCTURAL CONSIDERATIONS

The rating of the senior secured TLB3 and TLB4 is also Ba1 in line with the CFR reflecting a single debtor class in the capital structure. The senior secured TLB3 and TLB4 rank pari passu because they share the same security, consisting mainly of share pledges. The senior secured TLB3 and TLB4 also benefit from the guarantees of material subsidiaries representing at least 75% of the consolidated EBITDA. The senior secured Ladbroke bonds rank pari passu with the senior secured TLB3 and TLB4 and share the same security.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects the expected recovery in retail revenues to pre-Covid levels over the next 12 months. In addition, the stable outlook reflects the view that leverage will continue to decline despite possible regulatory headwinds in the UK. Entain's effort to date to pursue a responsible gaming strategy would possibly mitigate some of the foreseen negative impacts from the review of the Gaming Act later in 2022.

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

Upward pressure on the ratings could arise over time if the company's (1) Moody's-adjusted gross leverage falls sustainably below 2.5x; (2) the company's retained cash flow (RCF)/Net debt (as adjusted by Moody's) remains sustainably above 35%. For an upgrade Moody's also expects the group to further define its dividend policy and reduce its appetite for yearly acquisitions.

Downward pressure on the ratings could occur if the company's (1) Moody's-adjusted gross leverage is maintained for a prolonged period of time above 3.5-4.0x; (2) retained cash flow (RCF)/Net debt (as adjusted by Moody's) deteriorates towards 20% and (3) changes to its financial policy resulting in greater appetite for leverage. A downgrade could also occur as a result of materially adverse regulatory actions in one or more of the larger geographies.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Gaming published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276316. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Entain is one of the largest global gaming & betting operators with revenues of GBP3.9 billion and EBITDA of GBP0.9 billion for 2021; it has operations in 31 regulated or regulating territories, more than 25,000 people in 20 offices across five continents. Listed on the London Stock Exchange and a constituent of the FTSE 100 index, it has a market capitalisation exceeding GBP9.2 billion.

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.

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.

Stefano Cavalleri
VP-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

Mario Santangelo
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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