Light & Wonder’s Smart SciPlay Merger Boosts Credit Outlook

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In a strategic effort to improve its financial standing, gaming company Light & Wonder has recently had its credit rating affirmed by Fitch Ratings at “BB,” reflecting a stable outlook for the gaming device manufacturer. This news comes as an optimistic signal, as Light & Wonder continues to successfully decrease its leverage, marking a significant stride in fortifying its financial health.

The company’s recent consolidation with social casino developer SciPlay has proven to be a wise maneuver. By acquiring the remaining shares of SciPlay this past October and bringing the developer fully into its fold, Light & Wonder has notably enhanced its free cash flow (FCF) margins, now eclipsing those of its industry peers. Coupled with this merger, Light & Wonder’s leverage remains decidedly prudent. In the current climate, where interest rates weigh heavier on fiscal strategies, the company’s commitment to conservative financial practices places it in a beneficial position.

Fitch’s analysis gives weight to Light & Wonder’s astute financial policies, despite observing an incremental uptick in leverage due to the SciPlay acquisition. Nevertheless, thanks to the company’s substantial FCF and solid liquidity, alongside a deliberately reserved leverage strategy, its credit profile can confidently maintain a “BB” rating. The slight shadow cast upon this otherwise favorable scenario arises from Light & Wonder’s significant engagement with the volatile Gaming segment, a factor known for its potential to destabilize earnings.

The company’s journey toward reducing debt has been both sharp and decisive. Prior to its rebranding from Scientific Games, the company divested its lottery and sports betting businesses in a series of transactions amounting to roughly $7 billion. This not only garnered accolades from Wall Street but also profoundly diminished its debt load. Streamlining its business model, Light & Wonder also reallocated funds to nurture its rapidly expanding iGaming sector. Despite the slot machine manufacturer’s credit rating lingering within the “junk” classification, its debt reduction strategy stands in lockstep with such a rating.

Looking ahead, Fitch anticipates that the sustained performance of Light & Wonder’s gaming equipment and systems will keep EBITDA leverage metrics in alignment with a “BB” rating throughout 2023 and 2024. Factors that fortify this outlook include an impressive projection of free cash flow and reliable liquidity, vital indicators of financial health.

In terms of share buybacks, Light & Wonder exhibits sufficient capacity to purchase a further $200 million of its own stock. Given the current climate with no substantial acquisitions on the near horizon, the company is well-armed to pursue leverage reduction towards its target ratio range of 2.5x to 3.5x.

The digital realm opens yet wider vistas for growth opportunities. Light & Wonder’s strategic acquisition of SciPlay not only brings fresh avenues but also shows clear signs of success, given the rising number of monthly players willing to pay for their offerings, despite a drop in total active users. This achievement is attributed to SciPlay’s relentless innovation through new game content, live events, and features that enhance overall user engagement.

It’s worth noting that while the digital gaming sector is rife with competition and inherent unpredictability in earnings, Light & Wonder’s strong footing in free cash flow generation strategically positions it to weather such storms.

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