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May 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Intralot Capital Luxembourg S.A.'s senior unsecured EUR250m 2021 bond a final 'BB-/RR3' rating. The terms of the final documentation are in line with the information already reviewed when assigning the expected rating on this senior unsecured instrument.
Senior Unsecured Ranking The bond was issued by Intralot Capital Luxembourg S.A., a Luxembourg-based financial vehicle wholly owned by Intralot S.A. (Intralot; B+/Negative) through Intralot Global Securities B.V. ranking as a senior unsecured obligation pari passu with its bank debt. The bond benefits from guarantees from Intralot and Intralot Global Securities B.V. and the main operating subsidiaries of Intralot Global Securities B.V. These guarantors account for approximately 57% of group EBITDA and 63% of group assets.
Bond Notched Up from IDR
Fitch believes that expected recoveries upon default would be maximised in a going-concern scenario rather than in liquidation given the asset-light nature of Intralot's business. We have applied a discount of 30% to Intralot's FY13 consolidated EUR192m EBITDA to reflect downside risks as well as the material minority interests in some of its subsidiaries and a 4x distressed multiple to derive a distressed enterprise value of EUR537m. Taking into account the new debt structure, including the EUR150m revolving credit facility (RCF) as fully drawn, we assess the recovery rate for the senior notes in the 51%-70% range ('RR3') leading to a one-notch uplift for the senior unsecured rating from the 'B+' IDR.
Debt Repayment, Gross Leverage Rises
The EUR250m senior unsecured bond issue will repay around EUR169m of RCF drawings and local loan debt, while EUR73m will be used as a cash buffer. The precise use of this new cash has not been earmarked but it can be used for capex, working capital or acquisition purposes. Fitch estimates that there could be a significant negative carry back from low-earning cash deposits in 2014, which could adversely affect credit metrics, notably funds from operations (FFO) gross and net leverage. The EUR250m senior unsecured bond maintains gross leverage at over 5.0x in 2014, although net leverage will remain around 3.5x in 2014 and 2015. We are focusing on gross leverage as we have limited visibility regarding excess cash being available for debt service.
Adequate Post-Issuance Liquidity
Intralot should have sufficient liquidity to repay the remaining EUR80m term loan due in December 2014, if the term loan facility and the current EUR150m RCF are not refinanced. Intralot is also working to improve its liquidity by refinancing the existing EUR150m RCF and EUR80m term loan, which both mature in December 2014. Fitch understands that subject to documentation the company has received over EUR200m of commitments from their bank group for the refinancing of these credit facilities.
Solid Operations, Higher Leverage
Leverage at end-2013 was higher than Fitch's forecast due to higher interest costs, working capital requirements and tax paid. Fitch expects gross leverage to stay above 5.0x in 2014.
Low Free Cash Flow
Free cash flow (FCF) should remain positive in 2014 due to a significant reduction in capex, but will be held back by increased working capital requirements and increased taxation in line with the expansion of the business. Some cash flow absorption is linked to the significant proportion of EBITDA that does not belong to Intralot (although fully consolidated), linked to joint ventures. This resulted in approximately EUR17m of annual minority dividend distributions in 2013, which reduced FFO and ultimately FCF in 2013.
Solid Track Record
Intralot's 'B+' IDR reflects its established track record of winning and retaining high profile gaming contracts, steady EBITDA growth from its licensed operations division and a well-diversified contract portfolio. However, the ratings are constrained by the low credit quality of some of the countries in which the company operates, the important role and dividends paid to minorities, rising tax,and the increasing working capital requirements of the expanding business.
Limited Linkage with Greece
Intralot generates only 5% of its revenues and less than 10% of its EBITDA in Greece. While its management and a major proportion of its software developers and machine designers are based in Greece, overall these employees only account for 15% of the total. As of YE13 less than 10% of group cash was lodged in Greece or Cyprus.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive EBITDA growth derived from a stronger return on capital on existing and future contracts with limited capex outlays.
- FFO-based net lease adjusted leverage reducing sustainably below 3.0x (FFO gross lease adjusted leverage below 4.0x), with cash deposited predominantly at investment grade-rated counterparties.
- FFO fixed charge cover above 4.0x, unaided by favourable interest carry.
- Evidence of sustained positive FCF generation. Future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
Positive EBITDA growth derived from a stronger return on capital on existing and future contracts with limited capex outlays.
- FFO-based net lease adjusted leverage reducing sustainably below 3.5x (FFO gross lease adjusted leverage below 4.5x), with cash deposited predominantly at investment grade-rated counterparties.
- FFO fixed charge cover around 3.0x, unaided by favourable interest carry.
- Evidence of sustained positive FCF generation.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Evidence that new contracts or renewals are occurring at materially less favourable conditions for Intralot, such as lower margins, large upfront concession fees or capex outlays.
- FFO-based net lease adjusted leverage sustainably above 4.0x (FFO gross lease adjusted leverage above 5.0x).
- FFO fixed charge cover below 2.0x.
-Material reduction in liquidity without a commensurate reduction in gross leverage.