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International Game Technology PLC -- Moody's upgrades International Game Technology PLC to Ba2 CFR, outlook stable

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Rating Action: Moody's upgrades International Game Technology PLC to Ba2 CFR, outlook stableGlobal Credit Research - 11 Feb 2022New York, February 11, 2022 -- Moody's Investors Service ("Moody's") upgraded International Game Technology PLC's ("IGT") Corporate Family Rating ("CFR") to Ba2 from Ba3, Probability of Default Rating to Ba2-PD from Ba3-PD, and existing rated senior secured notes to Ba2 from Ba3. The company's Speculative Grade Liquidity rating was upgraded to SGL-2 from SGL-3 and the outlook is stable.The upgrade to Ba2 CFR reflects the strong performance of the company's resilient lottery segment, continued recovery in the company's gaming operations, and growing contribution from the company's digital and sports betting business. The strengthened performance, coupled with debt reduction largely facilitated by the sale of the company's business to consumer Italian gaming business and prudent expense management have resulted in a reduction in debt-to-EBITDA leverage, which Moody's expects to be at or below 4x, supportive of the Ba2 rating.Upgrades:..Issuer: International Game Technology PLC.... Corporate Family Rating, Upgraded to Ba2 from Ba3.... Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3....Senior Secured Regular Bond/Debenture, Upgraded to Ba2 (LGD3) from Ba3 (LGD3)..Issuer: International Game Technology....Senior Secured Regular Bond/Debenture, Upgraded to Ba2 (LGD3) from Ba3 (LGD3)Outlook Actions:..Issuer: International Game Technology PLC....Outlook, Remains Stable..Issuer: International Game Technology....Outlook, Remains StableRATINGS RATIONALEInternational Game Technology PLC's Ba2 CFR reflects the improvement of the company's operations and debt reduction, which have resulted in debt-to-EBITDA leverage expected to be maintained at or below the 4x range. Debt-to-EBITDA leverage was approximately 4.2x at September 2021 (assuming full consolidation of majority owned Lotto game and Scratch & Win instant lottery games in Italy, and about .3x higher if EBITDA is reduced by minority interest cash dividends). The credit profile benefits from IGT's large and relatively stable revenue base during normal operating periods, with more than 80% achieved on a recurring basis, and high barriers to entry. Further support is provided by the company's vast gaming-related software library and multiple delivery platforms, as well as potential growth opportunities in IGT's digital, mobile gaming, sports betting, and lottery products. IGT, through its joint venture with minority partners, is concessionaire of the world's largest instant ticket lottery (Italy) and Italy's draw based lottery and holds facility management contracts with some of the largest lotteries in the US. The lottery contracts provide a stable and recurring source of free cash flow with strong resilience demonstrated during the pandemic. IGT is constrained by its exposure to soft slot replacement demand trends in the US. Revenues are largely tied to the volume of gaming machine play and lotteries. Gaming is cyclical and dependent on discretionary consumer spending. The company can reduce spending on game development and capital expenditures when revenue weakens, but the need to retain a skilled workforce to maintain competitive technology contributes to high operating leverage.IGT is focused on accelerating growth by investing in various lottery contract extensions and in digital and betting. Lottery renewals require capital and some significant upfront cash payments (Italian contracts). These factors along with the company's shareholder dividend and minority interest dividends will create considerable uses of cash over the next two years. Free cash flow is likely to be lower than it has been on an LTM basis, with an expectation for improvement as earnings grow and returns on investments made are realized.The company's speculative-grade liquidity rating was upgraded to SGL-2 from SGL-3, reflecting the repayment of revolver borrowings and improving covenant cushion. IGT's good liquidity reflects unrestricted cash of approximately $435 million as of September 30, 2021, with a fully undrawn revolver of approximately $1.8 billion that expires in 2024. As of the quarter ended September 2021, the company is subject to a 6.25x net leverage covenant (with step-downs) and an EBITDA to total net interest costs ratio of 3.0x. Moody's projects the company will have good cushion within the covenants.The coronavirus outbreak and the government measures put in place to contain it continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, the recovery is tenuous, and continuation will be closely tied to containment of the virus. As a result, a degree of uncertainty around our forecasts remains. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. IGT also remains exposed to discretionary consumer spending that leave it vulnerable to shifts in market sentiment in these unprecedented operating conditions.Additional social risks include changing consumer preference related to consumer entertainment preferences and population demographics that may move in a direction that does not favor traditional casino-style gaming. At the same time, the younger generation may not be spending as much time playing casino-style games as previous generations. Additionally, while traditional casino games remain popular, consumer spending on such nonessential entertainment has proven to be highly discretionary.Governance risks are moderately negative and linked primarily to financial policy with some risk related to leverage and distribution policies. Concentration in ownership (50% with De Agostini S.p.A.) is partially mitigated by the company's credibility and track record. The company has a publicly stated target of maintaining leverage in the 2.5-3.5x net leverage level over the investment cycle.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook considers Moody's expectation that the recovery in the company's business exhibited in 2021 will continue over the next few years. The stable outlook also incorporates the company's good liquidity and Moody's expectation for debt-to-EBITDA leverage to be maintained at or below the 4x level.Ratings could be downgraded if liquidity deteriorates, if Moody's anticipates IGT's earnings to decline or there are reductions in discretionary consumer spending. Debt-to-EBITDA leverage sustained over 4.5x (with EBITDA reduced by minority cash dividends) could result in a downgrade.The ratings could be upgraded if operations continue to improve such that debt-to-EBITDA leverage is sustained below 3.5x (with EBITDA reduced by minority cash dividends). Consistent and meaningfully positive free cash flow while maintaining good reinvestment levels that generate solid returns would also be required for an upgrade.International Game Technology PLC is a global leader in gaming, from Gaming Machines and Lotteries to Sports Betting and Digital. The publicly traded company operates under three business segments: Global Lottery, Global Gaming, and Digital & Betting. The company is publicly traded and consolidated revenue for the last twelve-month period ended September 30, 2021 was approximately $3.9 billion. International Game Technology has corporate headquarters in London, and operating headquarters in Rome, Italy; Providence, Rhode Island; and Las Vegas, Nevada.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Adam McLaren Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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