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Inspired Entertainment, Inc. -- Moody's upgrades Inspired Entertainment to B3; outlook stable

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Rating Action: Moody's upgrades Inspired Entertainment to B3; outlook stableGlobal Credit Research - 09 Apr 2021London, 09 April 2021 -- Moody's Investors Service ("Moody's") has today upgraded Inspired Entertainment, Inc. ("Inspired" or "the company")'s corporate family rating (CFR) to B3 from Caa1 and its probability of default Rating (PDR) to B3-PD from Caa1-PD. Concurrently, Moody's has upgraded to B3 from Caa1 the instrument ratings on the GBP220 million equivalent backed senior secured term loan B (GBP140 million term loan B1 and EUR90 million term loan B2) and the GBP20 million backed senior secured revolving credit facility (RCF), all borrowed by Gaming Acquisitions Limited. The outlook of both entities remains stable.RATINGS RATIONALEThe upgrade of Inspired's ratings to B3 reflects the imminent relaxation of lockdown restrictions in the UK, including the reopening of betting shops on 12 April 2021. Although delays in further lockdown easing cannot be ruled out, the UK government's commitment to not reversing relaxation, coupled with the UK's successful vaccine roll-out provides a level of comfort not present six months ago. Moody's expects Inspired's credit metrics to return sustainably to levels commensurate with its B3 rating over the next 12-18 months, including gross leverage (Moody's-adjusted) decreasing towards 5x by the end of 2022. Leverage spiked to 12.7x in 2020 due to the impact of the pandemic (Moody's adjusted EBITDA excludes the GBP31.1 million impact from VAT rebate received across Q3 and Q4 2020 as part of the company's revenue sharing arrangement with licensed betting shop customers).The B3 CFR is constrained by (1) the company's relatively small scale in a competitive market and geographic concentration in the UK, although there is a niche aspect to the business as well as a growing international presence; (2) the predominantly mature land-based nature of Inspired's business, with Virtual Sports and Interactive providing an online mitigant; (3) the reduced financial flexibility following the coronavirus impact to its business, with debt levels around USD27 million higher mainly due to capitalized interest and fees, plus 1% higher cash interest margins on its debt (now 7.75% to 8.25%) and additional PIK interest of 0.75% to apply from September 2021 if facilities are not repaid, all as a result of the covenant waiver/amendment process negotiated in 2020 to support the business through the pandemic and; (4) exposure to the risks of social pressures in the context of evolving regulation, particularly in the UK.Inspired's B3 rating is supported by (1) leading positions as a niche player in its core markets; (2) circa 90% recurring revenues based largely on profit sharing or fixed fees, although this is dependent on footfall which is subject to the risk of betting shop and pub closures, and; (3) the company's well invested asset base which will reduce capex pressure in the next few years.The stable outlook is reflective of Moody's view that the business will recover toward pre-crisis levels in the next 12-18 months, and that while there could be delays in the complete removal of social distancing measures this is appropriately captured at the current rating level of B3. The stable outlook also reflects the rating agency's expectation that the company will maintain an adequate liquidity position including adequate headroom under its financial maintenance covenant.LIQUIDITY PROFILEMoody's considers Inspired's liquidity to be adequate, supported by: (1) cash on balance sheet of c. GBP34.5 million as of 31 December 2020; (2) fully available GBP20 million RCF, and; (3) no term debt maturities before October 2024. The RCF contains a leverage covenant which was revised with adequate headroom as part of the amendments to the SFA in 2020, although Moody's notes that this materially tightens from June 2021 onwards. The tightening of the covenant nevertheless coincides with the timing of the recovery of earnings following the phasing out of the lockdown in the UK.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings are unlikely to be upgraded in the short term. However, upward pressure on the ratings could occur once all social distancing restrictions have ended, and the company achieves a reduction in Moody's adjusted leverage towards 4x on a sustainable basis as well as generating positive free cashflow whilst maintaining good liquidity.Moody's could downgrade Inspired's ratings if there are expectations of a renewed period of complete shutdowns as a result of the coronavirus outbreak, if leverage remains above 5.5x on a sustained basis, or if liquidity deteriorates.STRUCTURAL CONSIDERATIONSInspired's debt capital structure comprises GBP220 million equivalent senior secured loan and a senior secured GBP20 million RCF. The senior secured RCF ranks pari passu with the senior secured loan and thus their B3 instrument ratings are in line with the company's CFR.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.CORPORATE PROFILEInspired offers an expanding portfolio of content, technology, hardware and services for regulated gaming, betting, lottery, social and leisure operators across retail and mobile channels around the world. The company operates in approximately 35 jurisdictions worldwide, supplying gaming systems with associated terminals and content for more than 50,000 gaming machines located in betting shops, pubs, gaming halls and other route operations; virtual sports products through more than 44,000 retail channels; digital games for 100+ websites; and a variety of amusement entertainment solutions with a total installed base of more than 19,000 devices.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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Kristin Yeatman Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Peter Firth Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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