Intralot Downgraded To 'CCC+' On Weakened Liquidity And Elevated Leverage; Outlook Negative

  • Following Intralot losing its betting contract with Turkish gaming platform IDDAA, and the disposal of Azerinteltek at end-2018, we expect the company's operating performance to deteriorate further and lead to an increase in adjusted leverage to 8.5x-9.0x by end-2019.
  • We believe this reduces Intralot's ability to fund its operational, financial, and capital expenditure (capex) needs, as well as to refinance its €15 million loan with Nomura maturing end-March 2019.
  • Intralot's ability to build a sufficient liquidity cushion depends on substantial asset disposals and/or renegotiation of already-exceeded covenants under its revolving credit facilities (RCFs).
  • As a result, we are lowering to 'CCC+' from 'B-' our long-term issuer credit rating and issue ratings on Intralot. The outlook remains negative.
  • The negative outlook reflects our view that we could lower the ratings further in the next 12 months if cash balances continue to deplete. This would happen if the company was unable to dispose non-core assets and failed to renegotiate its springing covenants for the RCFs. We could also downgrade Intralot if it appeared more likely to launch a distressed restructuring transaction.
LONDON (S&P Global Ratings) March 15, 2019—-S&P Global Ratings today took the 
rating actions listed above. The downgrade follows Intralot's tightening 
liquidity position and recent loss of one of two Turkish contracts; IDDAA 
which represented about 10% of proportionate EBITDA in 2017. Specifically, we 
expect a further increase in proportionate adjusted debt to EBITDA to 
8.5x-9.0x by year-end 2019, and we expect Intralot will only start reducing 
leverage in 2020-2021. We expect discretionary cash flow (DCF; free operating 
cash flows [FOCF] after minority dividend payments) on a fully consolidated 
basis will be negative in the next three years. This reflects poor operating 
cash flow generation, significant capex requirements, and dividend payments to 
minorities. This puts further pressure on the rating.

Under our revised forecasts we expect consolidated EBITDA to decline to about 
€105 million in 2019 from about €140 million-€145 million expected for 2018 
(including Azerinteltek). This is mainly because of the exclusion of the 
Inteltek operations in Turkey (€23 million EBITDA in 2017) as well as the 
Azerinteltek business in Azerbaijan (€20 million EBITDA in 2017). On a 
proportionate basis, we expect S&P Global Ratings-adjusted EBITDA in 2019 will 
be about €85 million. We expect S&P Global Ratings-adjusted leverage to 
increase above 8.5x by end of 2019. Such high leverage, along with the 
impending liquidity shortfall, brings into question Intralot's capital 
structure sustainability.

We also believe liquidity could come under pressure in the next 12 months. 
Intralot's cash on balance sheet and funds from operations (FFO) will barely 
cover the company's working capital changes, capex, and minority dividend 
payments over the next 12 months. Intralot has a €15 million loan with Nomura 
maturing in March 31, 2019, with an already-breached net leverage covenant of 
3.75x. If this covenant is not renegotiated, they will not be able to 
refinance it and therefore the loan will be paid with cash on balance sheet. 
The two bilateral facilities, amounting to €70 million, are currently not 
available given that the springing covenant of 4.75x has been exceeded.

The negative outlook reflects that we could downgrade Intralot further in the 
next 12 months if it fails to dispose non-core assets and/or renegotiate the 
financial covenants of its RCFs. This would lead to liquidity stress and the 
company being unable to fund capex needs and other expenses.

In our view, Intralot's business remains constrained by its significant 
exposure to emerging markets (such as Turkey, Morocco, and Argentina), 
potential significant foreign-exchange fluctuations and the high regulatory 
and taxation risk in the global gaming industry. These constraints are 
somewhat offset by Intralot's strong position among leading gaming-technology 
and sports-betting companies and it being a vertically integrated company that 
provides technology as well as operating machines. Intralot is also well 
positioned in the U.S., which could benefit it in the future in light of 
changes in U.S. sport betting regulations.

For additional analysis of Intralot's business risk, see "Greek Gaming Company 
Intralot Outlook Revised To Negative On Increased Leverage; 'B' Ratings 
Affirmed," published April 25, 2018, on RatingsDirect.

Earnings from Intralot's partly-owned subsidiaries (such as those in Turkey, 
Bulgaria, and Argentina) are fully consolidated, while debt is largely 
situated at the HoldCo level. This distorts the company's credit metrics. We 
therefore assess Intralot's financial risk profile on a proportionate basis 
because not all of the group's cash flows are available to service debt, since 
they belong to partnerships and ultimately to minorities according to their 
relevant stakes.

On a fully consolidated basis, Intralot has weak DCF generation with a highly 
leveraged DCF-to-debt ratio. We consider this a true measure of free cash flow 
for Intralot, since we measure DCF after deducting significant 
nondiscretionary dividends paid to minority interests at the subsidiary level.

The negative outlook reflects our view that S&P Global Ratings-adjusted debt 
to EBITDA will climb to around 8.5x-9.0x driven by the expected decline in 
earnings and profitability coming from the loss of the Turkish contract and 
disposal of Azerinteltek. We believe that this will lead to liquidity 
constrains. Significant asset disposals will be needed to regain a liquidity 
cushion. Moreover, the company will likely require a further amendment or 
waiver of covenants over the near term to gain access to the RCFs.

We could lower the rating on Intralot if its liquidity position weakened 
further. This could stem from the company not managing to sell non-core assets 
and failing to achieve the required covenant amendment or waiver of its 
springing covenants under the RCF. We would also consider a downgrade if a 
distressed exchange or potential restructuring seemed likely over the next 12 
months. This could include a company voluntary agreement or buying back 
portions of its bonds.

We could revise the outlook to stable if Intralot successfully disposes 
non-core assets without materially affecting its profitability, and if it 
renegotiates the springing covenants under the RCFs so that it has some 
headroom to use them if needed.

An outlook revision to stable would also need Intralot to restore its 
profitability by effective efficiency measures and improved market conditions.
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