Lottery contractor Intralot has solvency problems
By Jeffrey Anderson
If there’s one thing the D.C. Council relied upon earlier this week when it waived procurement law in order to sole source the D.C. Lottery contract to its current vendor Intralot, it was the analysis and assurances of Chief Financial Officer Jeffrey DeWitt.
But a recent analysis by Moody’s Investors Service, a top investor’s ratings service, shows that the Greece-based international gaming firm has weak liquidity and declining cash flow.
In lobbying the Council to approve an exemption from competitive bidding requirements, DeWitt placed his 30-year career reputation on the line when he touted Intralot’s superior experience and leadership in its industry. The firm is on the fast track to receive a brand new monopoly contract that includes sports betting, which DeWitt and senior Council members have pitched as the Holy Grail of D.C.’s revenue forecasts.
Just last year, Moody’s upgraded the District’s bond and credit ratings to the highest levels possible, but its assessment of Intralot is headed in the other direction.
Its downgrade of Intralot “reflects our expectation that free cash flow will remain negative until at least until 2020, in conjunction with the absence of available access to external sources of cash,” according the December 24 ratings service report.
A spokesperson for Moody’s has confirmed for District Dig that Intralot’s rating is the weakest among the most likely bidders for the contract. The revelation casts doubt on DeWitt’s analysis, and on whether the Council had notice and time to consider Intralot’s financial standing.
DeWitt’s office did not return a call and email seeking comment. Council Chairman Phil Mendelson, who introduced the bill, did not respond to a request for comment.
Ward 2 Councilmember Jack Evans, chair of the Committee on Finance and Revenue who oversees the Office of the Chief Financial Officer and is Intralot’s chief proponent, did not return an email from The Dig.
None of the other 11 members of the Council responded to an email inquiry.
By all appearances, Intralot has great expectations if not an urgent need to succeed in the D.C. market. The Moody’s analysis, which downgrades the firm from a B2 to a B3 rating, attributes the company’s weak liquidity to “the ongoing negative free cash-flow which we expect to persist for at least the next 12 months” and to its dependence on asset disposal to reverse its course.
Intralot’s market position as a global supplier of integrated gaming systems and services–with a portfolio of 86 contracts and licences in 50 jurisdictions–is a plus, the analysis says. And its negative cash flow outlook could be mitigated by gaining a strong foothold in the United States.
But that makes Intralot a risky bet for the District, one that seasoned observers find surprising. “Intralot’s debt was downgraded because the cash flow is negative, debt is rising, and they have bond payments due in a few years,” says Greg Boyd, a former stockbroker and veteran investor and trader who lives in Ward 1.
Boyd, and others who spoke with The Dig for this story, were perplexed that the Council would agree to scrap the entire procurement code in favor of Intralot, despite DeWitt’s reputation for keeping a steady hand on the city’s finances.
“Another unsophisticated move by the Council,” he says. “It looks like Intralot executives swayed the Council members with the idea that if they didn’t move now all would be lost in the [rush to the sports betting] market. I think they were totally hoodwinked.”
DeWitt has attributed his request to exempt Intralot from D.C. procurement law to the need to launch mobile sports betting ahead of Virginia and Maryland. The fast track recommendation has resulted in fierce lobbying by major gambling interests and local minority business owners alike.
Observers say that at times DeWitt has appeared to work harder to gain passage than the lobbyists themselves, earning a 7-6 vote earlier this week in favor of Intralot.
Yet it is unclear how many of those seven votes were apprised of the Moody’s rating, and to what degree DeWitt reviewed and weighed news of the downgrade.
The Moody’s rating was first reported on Thursday by Washington Post columnist Colbert King, via Twitter.
Since the U.S. Supreme Court struck down prohibitions against sports betting, the OCFO, in lockstep with Evans and now Mendelson, has taken numerous steps to lay the groundwork for the exclusive award.
The plan is to digitize the lottery and implement sports betting on mobile phone apps for players within the District, except for federal property or protected areas near brick-and-mortar betting sites such as arenas, stadiums, restaurants and clubs.
DeWitt’s first parlay last fall was to simply amend the existing contract to include sports betting, as The Dig recently reported. Lawyers for the OCFO and the Office of the Attorney General shot that down.
Meanwhile, Evans introduced “emergency” legislation in September to legalize sports betting. The Sports Betting Lottery Act passed easily, by a vote of 10-2, on December 18. (Ward 6 Councilmember Charles Allen was absent.)
In January, DeWitt requested that the Council waive procurement law to speed the contract award process. Mendelson introduced “emergency” legislation that was shot down as Council members paused for a moment to consider the measure, setting the stage for this week’s vote.
Much of the discussion has revolved around a December 27 report the OCFO commissioned from gaming consultant firm Spectrum Gaming Group, which bolstered the narrative that the District stands to lose $240 million in business, $133 million of “value added,” and $14 million of personal income if it conducts a full procurement process, which DeWitt has said could take up to three years, with contract appeals.
Behind the scenes, another scenario was unfolding last fall, as the OCFO quietly canceled a contract with a government consultant who had been tasked with drafting the prospective RFP. The OCFO also has terminated that contractor’s general consulting contract and is seeking a new consultant.
This latest development signals a departure not just from procurement law but from the OCFO’s fiduciary duty to the city, according to Eric Payne, the office’s former director of contracts who won a $3.4 million settlement against the District after being fired in the face of pressure from his superiors to tinker with Intralot’s original lottery contract.
Payne points to the Office of Contracts and Procurement’s standard practice of requiring what is known as “Determination And Findings For Contractor Responsibility,” meant to ensure that a contractor has “adequate financial resources to perform the contract or the ability to obtain those resources.”
Those determinations include an analysis of debt and liquidity, Payne says, and should be considered pro forma for a contract like the lottery.
“Standard practice is to always review publicly available data to determine if a proposed contractor is a responsible party,” Payne tells The Dig. “Having your liquidity questioned should make everyone in the government concerned.”
It is unclear whether DeWitt conducted a D & F, and if so, whether he shared it with the Council. But given his strident recommendation of Intralot as an industry leader, and as the arbiter of fiscal analysis for the city, he might now be called upon to reconcile his judgment with that of the very ratings service officials have cited for D.C.’s stellar bond rating.
*This post has been updated.