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Flutter Financing B.V. -- Moody's assigns a Ba1 rating to Flutter Financing's proposed new senior secured term loan B

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Rating Action: Moody's assigns a Ba1 rating to Flutter Financing's proposed new senior secured term loan BGlobal Credit Research - 08 Sep 2022Paris, September 07, 2022 -- Moody's Investors Service ("Moody's") has today assigned a Ba1 instrument rating to the proposed new EUR1 billion equivalent USD denominated senior secured term loan B issued by Flutter Financing B.V. (Flutter Financing), a subsidiary of Flutter Entertainment plc (Flutter or the company). Flutter is an Irish-based global gaming and sports betting operator.The proceeds from the issuance of the proposed new senior secured term loan B will be used to partly refinance the additional debt facility of EUR2 billion that was used to fund the acquisition of Sisal S.p.A. (Sisal), an Italian-based gaming operator, completed on 4 August 2022 for a consideration of EUR1.91bn.The assigned rating is subject to review of final documentation and no material change to the terms and conditions of the transaction as communicated to Moody's.RATINGS RATIONALEFlutter Financing's Ba1 proposed new senior secured term loan B instrument rating is in line with Flutter's Ba1 corporate family rating (CFR) which reflects its pari passu ranking with Flutter Financing's existing senior secured term loan B.The proposed new senior secured term loan B rating assumes that the existing senior secured term loan B as well as the new senior secured term loan B and other debt that might be issued to refinance the Sisal acquisition facility will be pari passu, and share the same guarantor and security package, which Moody's understand will be the case.Flutter's credit quality is supported by Moody's expectation of EBITDA growth driven by the expected shift to a sustainably positive EBITDA contribution from its US operations as well as Moody's expectation that the company will use its strong free cash flow (FCF) generation and cash on balance sheet to repay debt. Moody's expects that this will result in Moody's gross adjusted leverage improving to around 4.0x in 2023. However, Flutter is currently more weakly positioned in its rating category given Moody's expectation of delays to its deleveraging trajectory. This is due to the company's weaker than expected profitability in the first half of 2022, the higher debt burden due to the stronger USD, and a lower free cash flow (FCF) forecast in 2023 due to higher capex expected in 2023. Negative rating action is therefore likely if there is further downside deviation to current forecasts.Flutter remains committed to its public net leverage target of 1 to 2 times in the medium-term but Moody's expects Moody's gross adjusted leverage will be 4.8x in 2022 pro forma the consolidation of Sisal, compared with around just above 4.0x as per Moody's previous expectations. Moody's forecasts that the US business will reduce its negative EBITDA contribution next year but only start contributing positively to the group's EBITDA in 2024 because of the potential launch of operations in California. Previously, the rating agency expected the US operations to break even in 2023. Flutter's revenue increased 9% year-on-year in constant currency in the first six months of 2022 driven by the very strong growth in its US business. However the group's reported adjusted EBITDA declined 19% in the first half of the year because of (i) customer acquisition costs related to the growth in the US, (ii) the costs associated with the implementation of safer gambling measures, (iii) the company's exit from some markets and (iv) regulatory changes in the International division.According to the company, Flutter is the leader in online sports betting in the US with a 51% market share in Q2 2022, and the US represented one third of the group's revenue in the quarter. Flutter guided for an EBITDA loss in the US ranging between GBP225 million and GBP275 million this year and states that the US business is on track to be EBITDA positive for the full year 2023 based on current new state launch plans and excluding California. Flutter's Ba1 CFR continues to be supported by: (1) its leading position in the global online gaming and sports betting market with podium positions in the largest online regulated markets; (2) its focus on the online segment, which is the main growing segment in the gaming and sports betting industry; (3) its diversified product offering within the gaming and sports betting market, supported by leading brands; (4) the good positioning of its products and business model relative to peers, which should allow it to capture the significant growth opportunities in the US, and which is expected to become the largest market globally in the medium-term; (5) the company's strong free cash flow generation; and (6) its conservative financial policy.Conversely, the rating is constrained by: (1) the increased risks of a delay in Flutter's deleveraging trajectory linked with the acquisition of Sisal as well as with the uncertainties around the path towards sustainable profitability in the US business (2) the geographical concentration in the UK online market, although the company will increasingly grow its exposure in the US; (3) the regulatory risk associated with the gaming industry, especially with the current review of the UK Gambling Act.STRUCTURAL CONSIDERATIONSFlutter's probability of default rating (PDR) is Ba1-PD, in line with the CFR, reflecting our assumption of a 50% recovery rate as is customary for capital structures including bank debt and notes. Flutter's senior secured term loans are rated Ba1, in line with the CFR..LIQUIDITYFlutter's liquidity is good and supported by GBP781 million of available cash on its balance sheet as of June 2022; GBP277 million available under its senior secured revolving credit facility (RCF); and Moody's forecast that Flutter, combined with Sisal, will generate strong FCF in the range of GBP100 million-GBP250 million in 2023. This forecast for strong FCF is despite significant investments in the International and US divisions and the exceptional cash outflow linked with the settlement of the FanDuel employee incentive plan. Depending on the return to profitability of the US business, Moody's expects FCF as of 2024 to be well above GBP500 million. The next significant debt maturity is in 2025.In addition to its cash balance and cash generation, Flutter has some financial flexibility due to the group's 95% ownership of FanDuel with alternative sources of liquidity, such as a potential partial FanDuel IPO.The senior facility agreement (SFA) contains a maintenance finance covenant based on consolidated net first-lien leverage set at 5.1x and tested semi-annually. Moody's expects that Flutter will maintain a comfortable headroom under this covenant.RATIONALE FOR STABLE OUTLOOKThe stable outlook on Flutter's ratings reflects Moody's expectation that the group will generate strong EBITDA growth from 2022 to 2024 largely driven by the ramp-up of activities in the US combined with our expectation that the company will demonstrate its commitment to reduce leverage to below 4.0x on a Moody's gross adjusted basis by using its strong FCF generation and cash on balance sheet to repay bank debt.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGPositive rating pressure on Flutter's ratings is possible if its Moody's-adjusted debt/EBITDA decreases below 3x on a sustained basis and the company continues to have good liquidity. Positive rating action would also require evidences of a more conservative financial policy, including a proven commitment to debt reduction, and the successful integration of acquisitions.Negative rating pressure on Flutter's ratings could arise if: (i) the company's Moody's-adjusted debt/EBITDA remains above 4x for a prolonged period, (ii) its operating performance deteriorates more than our forecast in the next 12-18 months, (iii) regulations have a significant impact on the profitability of Flutter's online activity and the company is unable to mitigate this effect, (iv) the integration of Sisal creates disruptions that hurt Flutter's operating performance or FCF generation.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was Gaming published in June 2021 and available at https://ratings.moodys.com/api/rmc-documents/72953. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.COMPANY PROFILEFlutter Entertainment plc (Flutter), headquartered in Dublin, is a global online sports betting and gaming operator. The group operates sports betting, gaming and poker online via a portfolio of leading international brands. Flutter's main countries of operations are the UK and Ireland, Australia and the US. However, the company also has operations across the world with customers in more than 100 countries. In the UK and Ireland, Flutter also operates a retail network of betting shops under the Paddy Power brand. In 2021, the company generated GBP6,036 million of revenue and reported GBP1 billion of EBITDA before separately disclosed items such as costs related to the settlement of the Kentucky legal proceedings. Flutter is listed on the London Stock Exchange and on Euronext Dublin.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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