Light & Wonder Lands Junk Grade From Fitch

Light & Wonder (NASDAQ: LNW) garnered a non-investment credit grade of “BB” in a report published by Fitch Ratings yesterday.

Light & Wonder
Light & Wonder signage at a roulette table. Fitch placed a junk rating on the company. (Image: Twitter)

A “stable” outlook accompanies that rating. The Las Vegas-based gaming device manufacturer has long been raising cash in an effort to firm its balance sheet and potentially bolster its credit profile. Last year, the company announced sales of its OpenBet sports wagering and SG Lottery units, which enabled the firm to slash its debt to $4 billion from $8.8 billion.

Fitch believes LNW’s credit profile remains consistent with ‘BB’, due to robust free cash flow generation, strong liquidity, and still conservative leverage. Fitch forecasts LNW’s gross leverage will decline below 4.0x by 2023 through earnings before interest, taxes, depreciation, and amortization (EBITDA) growth (3.8x), though Fitch previously expected LNW to reach mid-3x by YE 2022,” according to the research firm.

On Fitch’s ratings scale, a “BB” grade implies increased potential of issuer default in the event of a sudden shift in business or broader economic conditions. But issuers with that grade usually have the flexibility to adequately service debt obligations.

Light & Wonder Leverage Reduction Efforts

Light & Wonder’s debt-paring efforts are paying off in the form of a lower leverage ratio, which could eventually lead to a stronger credit rating.

As a result of the debt reduction, Light & Wonder reduced its net debt leverage ratio to 3.9x from 6.2x. By trimming its net debt leverage to 3.9x, Light & Wonder is within striking distance of its desired range of 2.5x to 3.5x.

Efforts to further reduce debt, which are highly pertinent against the backdrop of rising interest rates, are further supported by Light & Wonder’s enviable share in the premium slot machine market.

“The company garners low-20% market share for both slot sales and installed base of premium slots in North America, which has come down considerably over the last decade as peers aggressively entered the market,” added Fitch. “With this share, the company comfortably remains a top three supplier, and the company consistently rolls out attractive new content and cabinets that has helped maintain a leading competitive position.”

Light & Wonder Digital Exposure Could Pay Off

Light & Wonder is also making moves in the digital gaming arena, which could pay off for the balance sheet and investors over the long haul.

Some investors are pushing the company to revisit a takeover offer for SciPlay (NASDAQ: SCPL). Light & Wonder owns 81% of SciPlay. Formerly the social gaming division of Scientific Games, SciPlay was spun off from that company in 2019. SciPlay’s well-known offerings are Jackpot Party, Quick Hit Slots, Gold Fish Casino Slots, Hot Shot Casino, 88 Fortunes, Bingo Showdown, and Monopoly Slots. The games are free to play, but feature in-app purchases.

“Fitch expects the company to pursue more casual mobile gaming development as an avenue for revenue growth, which could lead to increased R&D and tuck-in acquisitions for talent or proven game titles,” noted the ratings agency.

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