Fitch Moderately Optimistic about Scientific Games Lottery Business

Scientific Games received a “B” default mark from Fitch Ratings on Tuesday with the credit rating company assessing the value of Light & Wonder’s lottery business. Scientific Games demerged from the rebranded Light & Wonder to pursue lottery operations on its own and is now run by Brookfield Business Partners in what was a $6-billion transfer of assets.

Some Rough Edges Still Need Fixing

Fitch Ratings preferred to be cautious about the allocation of a credit rating in the case, arguing that Scientific’s cash flow may prove problematic in the future. However, the agency acknowledged that Scientific was maintaining a solid position in the lottery industry and was generating strong results, including high margins, durable cashflows, and more.

Fitch is also optimistic about the future, arguing that the company’s leverage will be lowered to six times its cash flow in 2023 or even sooner. The lottery business, though, is more resilient than traditional gambling businesses, Fitch adds.

Essentially, lottery operations have “favorable characteristics” when compared to most other forms of gambling. The company clarified:

“Lottery is convenient and has broad appeal, exhibits less cash-flow volatility, and has delivered stable low- to mid-single-digit growth rates. The industry is less exposed to competitive threats seen elsewhere in the gaming industry.”

Fitch explained that while some states in the United States have been reluctant to adopt traditional gambling, lotteries have thrived. More so, Scientific Games has shown resilience despite the proliferation of casino gambling in high-value markets such as Pennsylvania, Ohio, Illinois, and Massachusetts. 

The rating agency did acknowledge, however, that in order to launch with a new partner, there is a significant upfront payment to account for systems and equipment installations as well as any additional maintenance. Capital exposure will also lessen with the agency citing strong cash-flow margins and operational income.

Resilience and Lack of Volatility Define Success

Lotteries’ lack of volatility is also an optimistic reason to expect more good things down the line. Fitch is actually optimistic about Scientific Games’ lottery operations, explaining that the narrow focus of the spun-off entity would be its greatest asset. Compared to others, Scientific Games is ahead of names such as Aristocrat Leisure and Everi Holdings, Fitch believes.

Scientific’s finances are only likely to continue improving as the company generates $50 million annually from joint-venture partner distributions. Scientific also has a $440 million revolving line to fall back on.