Fitch Assigns First-Time ‘B+’ IDR to Everi Holdings Inc.; Outlook Stable

Fitch Ratings – New York – 04 December 2019: Fitch Ratings has assigned first-time ‘B+’ Long-Term Issuer Default Ratings (IDR) to Everi Holdings Inc. and Everi Payments Inc. (collectively, Everi). In addition, Fitch has assigned a ‘BB+’/’RR1’ rating to Everi’s senior secured credit facility and ‘B+’/’RR4’ rating to Everi’s senior unsecured notes. The Rating Outlook is Stable.
Everi’s rating reflects its improved credit metrics, conservative financial policy, and position as a more niche gaming supplier, albeit with an expanding portfolio of products. The ratings also reflect Everi’s business mix diversification, as EBITDA is roughly split between slots and financial technology solutions (FinTech) for its casino customers.
On December 4, Everi announced an equity issuance and intends to use the proceeds to pay down debt. The transaction is viewed favorably and will create additional headroom at the ‘B+’ IDR level, reducing gross debt/EBITDA by roughly half a turn. Interest savings will be roughly $10 million annually and will further strengthen FCF.
KEY RATING DRIVERS
Improving Leverage Profile: Pro forma for the equity raise, Fitch calculates Everi’s pro forma debt/EBITDA in the low 4x range, which is significantly lower than 6.0x two years ago. Management has a net leverage target of 3.0x-3.5x, as reiterated on the third quarter earnings call, and plans on allocating FCF to debt paydown in order to achieve this. Historically, the company’s higher leverage offset its stable revenue mix, solid market position in the payments business and growth prospects for its gaming segment.
Healthy FCF Generation: Fitch calculates Everi’s LTM FCF through Sept. 30, 2019 at $30 million, or 6% of revenues. This has improved over the past few years thanks to EBITDA growth and lower interest costs. Fitch’s calculation adjusts for timing-related swings in FinTech working capital, which has a positive $164 million impact to CFFO during the same time period. Fitch projects the FCF margin to grow toward the low teens by 2020 as EBITDA grows, interest expense decreases, placement fees decline, and benefits from a larger premium installed base flowthrough. Fitch expects debt paydown to be the primary use of FCF in the medium term.
Good Business Mix: About 54% of Everi’s EBITDA comes from gaming and 46% from FinTech. About two-thirds of the gaming revenue is generated on a participation basis, whereby Everi earns fees based on games performance. FinTech revenues mostly come from ATM and cash advance service fees, which are tied to contracts with generally three- and five-year terms and high renewal rates. Although revenue in both segments depends on the gaming sector’s health, Everi is less dependent on replacement sales and new casino openings, relative to other gaming suppliers.
Solid EGM Strategy Execution: Everi has been investing heavily in its electronic gaming machine (EGM) content and hardware with good results to date. Everi has been able to grow its participation EGM footprint steadily and had roughly 14,000 participation games at the end of third-quarter 2019, roughly 4,400 of which were premium units. The premium unit installed base has more than doubled since 2016 with healthy average daily win growth. Fitch expects the premium segment to continue to grow, albeit at a decelerating rate, given the intense competition in this segment. On an LTM basis, Everi sold nearly 5,000 EGMs and has established itself as a roughly 6% ship share supplier (according to Eilers & Krejcik Gaming).
Technology Related Risks: New, cashless technologies employed by other participants in the gaming and FinTech industries represent a long-term risk to disintermediate Everi’s cash access services (roughly one-third of total revenues). However, the company’s diverse FinTech product portfolio, investments made in new technologies and its own cashless solutions, and maintenance of money transmitter licenses, reduces this risk. The gaming industry is highly regulated on a state-by-state basis and has been slow to adopt new technologies on the casino floor, where cash remains prevalent. Casino operators also generate a meaningful amount of fees from ATM transactions.
Lackluster View on Suppliers: The gaming equipment and cash access industry is characterized by a tepid, albeit improving, slot replacement cycle, shrinking slot floors and declining long-term new casino opportunities. For some, exposure to lottery, cash access systems, table games or social games provide diversification benefits. The new supply calendar in the U.S. received a near-term boost with recent gaming expansions, notably Illinois and Arkansas, resulting in approximately 9,000 in Fitch-estimated new EGM sales from 2020-2022. After 2022, growth will become harder to come by as there are limited expansion opportunities left in the U.S. At this point, the slot-replacement cycle and ship share will become the primary driver of performance for gaming equipment suppliers.
DERIVATION SUMMARY
Everi ‘B+’ Long-Term IDR reflects its declining leverage, conservative financial policy, healthy FCF metrics, stable revenue mix and strong position in the FinTech segment. Negative credit considerations include Everi’s niche position within the slots segment and the long-term disintermediation risk associated with its FinTech business. Everi’s gaming peers include International Game Technology plc (IGT), Scientific Games Corp. (SGMS), and Aristocrat Leisure (ALL); all of which have similar-to-stronger credit profiles due to greater scale, higher ship share, international diversification, product diversification (ex. lottery, table games), and/or lower leverage.
Scientific Games maintains higher leverage than Everi but also generates a healthy FCF margin. IGT’s and SGMS’ lottery businesses are positive from a cash flow stability perspective; however, they require meaningful recurring capex payments when contracts are won or renewed, which are often debt-funded. The Stars Group Inc. (TSG, B+ IDR) is another gaming peer, which is a large online gaming company with sizable poker, online casino, and sportsbook operations. TSG has higher, albeit declining, leverage but generates substantial FCF with a FCF margin closer to 20%.
KEY ASSUMPTIONS
Fitch’s Key Assumptions Within its Rating Case for the Issuer:
– 10% top-line revenue growth in 2019 due to the bolt-on acquisition of player loyalty assets and software refreshes in the company’s FinTech segment, combined with increased unit sales and average daily win in their Games segment. Fitch assumes mid-single digit overall growth for the remainder of the forecast due to growth in both the Games and FinTech segments, supported by new casino openings in the next three years. 2020 benefits from full year of larger installed base on the premium side and growth decelerates as new casino openings decrease after 2022.
– EBITDA margins remain in the 48%-50% range, growing towards the higher end by 2022.
-Total capex of $132 million in 2019, which includes $115 million of capex (mid-point of company guidance) and $17 million in placement fees. Thereafter, Fitch assumes slight growth in underlying capex given growth in the premium slot segment, as well as a small amount of annual placement fees ($5 million).
– Acquisition costs for player loyalty assets of $20 million in 2019, $10 million in 2020, and $10 million in 2021 (plus up to $10 million in earnout payments);
– FCF is allocated primarily toward debt paydown;
– Net cash benefit from swing in settlement receivables/liabilities in 2018 is offset in 2019. We assume this is a neutral impact to cash flow going forward.
Recovery Assumptions
The recovery analysis assumes that Everi Holdings Inc. would be reorganized as a going-concern in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim, and has assumed the $35 million revolver to be fully drawn at the time of recovery, and that the proceeds from the equity sale are mainly directed at the equity clawback of the unsecured notes.
Going-concern EBITDA of $184 million assumes a recessionary environment where Everi’s EGM business loses market share and the overall operating environment deteriorates with a slower replacement cycle and a slowdown in regional gaming revenues occurs. The scenario also assumes weakness in Everi’s FinTech business, possibly from technological disruption or the company losing major enterprise-wide payments contacts. While Everi has cashless processing solutions, the revenue from these solutions may not offset the loss of revenues from cash processing. The going-concern EBITDA due to the environment described above is roughly 25% lower than LTM EBITDA. During the previous recession, Everi’s FinTech revenue declined 19% peak-to-trough, while its games segment declined by a similar amount.
EV/EBITDA multiple of 5.5x, which is on the lower side of the range Fitch uses for larger and/or more diversified gaming technology companies and payment processors. The lower multiple takes into account Everi’s smaller size, more niche slots business and the longer-term risk relative to possible disintermediation of the core of its FinTech business. Everi diversifying its slots business further from its legacy class II segment and its FinTech segment away from payments could lead to Fitch using a higher EV/EBITDA multiple in the recovery analysis.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Gross debt/EBITDA sustaining below 3.5x;
-Continued market share in the U.S. gaming equipment industry, in particular with respect to its class III business;
-Continued diversification away from payment processing.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
-Debt/EBITDA sustaining above 4.5x;
-Significant deterioration and/or loss of market share in the gaming and FinTech segments;
-A decrease in FCF margin to the mid-single digit range;
-Adoption of a more aggressive financial policy, either toward target leverage or approach to shareholder returns at the detriment to the credit profile.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Everi’s liquidity includes $33 million in Fitch-estimated excess cash as of Sept. 30, 2019 and $35 million available on its revolver. FCF is healthy with Everi generating a FCF margin in the high-single digit range (when controlling for the timing impact of net settlement liabilities), which is set to improve further when considering the annualized benefits of operating improvements in 2019 (ex. reduced placement fees, larger gaming operations installed base). Everi’s business model is somewhat capital intensive as participation gaming machines and ATM equipment are retained by Everi and run through capex. Everi has no meaningful maturities until 2024 when the term loan comes due.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch adds back stock-based compensation and accretion of contract rights to EBITDA.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 – ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.