The Decline of Leverage in Light & Wonder Persists

Posted on: November 24, 2023, 12:17h.

Last updated on: November 24, 2023, 12:17h.

Light & Wonder’s (NYSE: LNW) ongoing efforts to reduce leverage have resulted in positive outcomes, with Fitch Ratings recently confirming the gaming device manufacturer’s credit grade of “BB” with a “stable” outlook.

Light & Wonder
Light & Wonder signage at a roulette table. The company’s leverage is declining and its credit profile is improving. (Image: X)

With the recent reunion with social casino developer SciPlay, Light & Wonder’s free cash flow (FCF) margins are outpacing those of comparable firms, and its leverage profile is increasingly conservative, which is seen as a positive development, especially in a high-interest rate environment.

SciPlay’s recent acquisition in October, when LNW bought the remaining 17% equity interest, added a half turn to the leverage,” noted the research firm. “Despite this, Fitch believes LNW’s credit profile remains consistent with ‘BB’, due to robust FCF generation, strong liquidity and still conservative leverage. The rating is offset by the company’s high exposure to the Gaming segment, which tends to drive earnings volatility.

Light & Wonder’s earnings before interest, taxes, depreciation, and amortization (EBITDA) dropped to 4.3x at the end of last year and is expected to further decline to 3.7x by the end of 2023, confirming debt-reduction plans are paying off.

Light & Wonder Rapidly Reduced Debt

In 2021, the company formerly known as Scientific Games sold its lottery and sports betting units in transactions that raised about $7 billion in cash.

Those transactions dramatically reduced debt, eliciting praise from Wall Street, and also simplified the Light & Wonder investment thesis. While the company’s credit rating is a junk grade, its debt metrics are in-line with that rating at the very least.

“The continued momentum of LNW’s gaming equipment and systems cash flows in 2024, coupled with stable digital cash flows, will allow LNW to keep its EBITDA leverage metrics in 2023 and 2024 consistent with ‘BB,’” added Fitch. “Notably, LNW’s strong expected FCF generation and strong liquidity remain consistent with the rating.

Light & Wonder has the capacity to repurchase at least another $200 million worth of its own shares, and with large acquisitions unlikely over the near-term, the company could make progress in terms of getting leverage down to its desired range of 2.5x to 3.5x.

Digital Could Boost Light & Wonder Growth

The aforementioned SciPlay transaction was aimed at boosting the acquirer’s footprint in a higher growth industry. Data indicate it was a shrewd move on Light & Wonder’s part.

“Monthly payer users have increased to 602,000 as of Sept. 30, 2023 from 577,000 as of Sept. 30, 2022, despite monthly active users decreasing by about 200,000 to 5.7 million over the same period due to turnover,” concluded Fitch. “This improvement, arising from SciPlay’s focus on introducing new content, features and live events in its games, has resulted in a higher payer conversion rate by 0.9% to 10.6%.”

Digital gaming is a space fraught with competition and earnings volatility, but Light & Wonder’s strong FCF generation can mitigate some of those risks.

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