Tabcorp Holdings Outlook Revised To Negative Amid COVID-19 Outbreak And Government Restrictions; 'BBB-' Ratings Affirmed

  • More onerous COVID-19 restrictions and containment measures will significantly reduce Tabcorp Holdings Ltd.'s revenue through its licensed venues, TAB agencies, on-course outlets and sports betting channels, constraining the company's ability to maintain an adjusted debt-to-EBITDA ratio below 4.0x.
  • In our view, the effectiveness of Tabcorp's capital management could be stretched as the operating environment deteriorates. The company has publicly stated that it is committed to maintaining the 'BBB-' rating, which we believe implies that it will take all reasonable actions to protect the interests of creditors.
  • On March 24, 2020, S&P Global Ratings revised its outlook on Tabcorp to negative from stable. We affirmed the 'BBB-' long-term issuer credit rating on the company and issue ratings on the company's debt.
  • The negative outlook reflects our view that COVID-19-related restrictions are likely to significantly affect Tabcorp's retail segment and wagering revenue, which, if protracted, could cause Tabcorp's leverage to move outside our tolerances for the 'BBB-' rating.
MELBOURNE (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions listed above. We revised the outlook to negative based on our expectations that government-led restrictions due to the COVID-19 pandemic will significantly cut Tabcorp's earnings. The restrictions include the temporary closures of Australian licensed gaming venues as a means of social distancing. The extent and duration of the closures to TAB agencies, as well as hotels and clubs that offer Tabcorp's wagering and media, Keno, and gaming services products, remain highly uncertain.
In addition, we see further downside risks to earnings if the racing industry is forced to suspend activities, similar to major Australian sporting codes and events. Racing accounts for around 85% of Tabcorp's wagering revenue. The wagering division, which comprises approximately 39% of group EBITDA, is sensitive to social distancing measures imposed on its retail channel. We believe the curtailment of retail channel distribution, declining sporting content, and the threat of race day postponements could result in adjusted debt to EBITDA exceeding 4.0x over the next 12 months.
The conversion of the lottery division's retail to digital channels will be critical for maintaining earnings growth and supporting the potentially worsening wagering division. Lotteries account for an increasingly larger portion of group earnings (EBITDA growth of 16% in the first half ended Dec. 31, 2019), driven by game portfolio innovation, technology investment, and benefits from the implementation of the omnichannel strategy. The lottery division's digital penetration has helped to boost an already strong performing division in recent periods.
We believe Tabcorp's undrawn facilities and minimal debt maturities over the next 12 months will help to shield the company against near-term liquidity pressures. In our view, the long-dated nature of the company's debt profile, undrawn banking facilities of around A$600 million, along with internally generated funds from operations support Tabcorp's liquidity position and ability to weather the COVID-19 disruption. We note that in the next 24 months, Tabcorp's only maturity is a U.S. private placement of A$171.5 million, which is fully hedged and matures in December 2020.
In our view, the company is committed to maintaining the 'BBB-' rating level. Tabcorp is publically committed to maintaining the 'BBB-' rating, which we believe implies that it will take all reasonable actions to protect the interests of creditors. We believe the company has a number of available levers to support balance sheet health including recalibrating shareholder returns and noncore assets sales. We believe Tabcorp's capital expenditure requirement of around A$300 million will not meaningfully undermine its liquidity position. Further, we expect the group to minimize operating capital expenditure where possible.
The negative outlook reflects our expectation that tough industry conditions are likely to persist over the next 12 months and test Tabcorp's ability to maintain its S&P Global Ratings-adjusted leverage below 4.0x. We anticipate Tabcorp will operate broadly in accordance with our expectations for the 'BBB-' rating despite debt to EBITDA potentially exceeding 4.0x over the next 12 months.
We could lower the rating on Tabcorp if we believed that the company would sustain its adjusted debt-to-EBITDA ratio above 4.0x in fiscal 2021.
This could happen if:
  • Further tightening of restrictions at sporting events incorporate postponement of major race days;
  • The recovery in retail attendance takes longer than we expect;
  • Slow conversion of retail traffic to digital distribution channel;
  • Licensed venue closures are implemented over a prolonged period; or
  • If shareholder returns were prioritized at the expense of creditor interests.
We could revise the outlook to stable if we forecast adjusted debt-to-EBITDA to remain below 4.0x in fiscal 2021. Rating stability could occur via a combination of earnings recovery and proactive measures to preserve the group's financial health.
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