Sole source lottery vendor Intralot’s slide continues
By Jeffrey Anderson
D.C. Lottery vendor Intralot, the beneficiary of a change in the law that handed it a sole source sports betting contract, has been downgraded by Moody’s Investors Service.
The top investor’s ratings service, which last year bestowed the District with a Aaa bond rating, today downgraded the Greece-based firm’s “corporate family rating” from B3 to Caa1, with a “probability of default rating” from B3 to Caa1 as well.
Moody’s also downgraded the District’s longtime lottery vendor’s instrument ratings on the EUR 250 million Senior Notes due 2021, and EUR500 million Senior Notes due 2024.
The outlook is negative.
The downgrade follows other developments that spell bad news for the international gaming firm, which has been divesting in emerging markets in order to invest in domestic sports betting markets, including in D.C., where it looks to digitize the lottery and capitalize on being first-to-market in sports betting.
D.C. Chief Financial Officer Jeffrey DeWitt and Ward 2 Councilmember Jack Evans, chair of the Committee on Finance and Revenue, spent considerable political capital in recent weeks, as they pushed the D.C. Council to pass (on an emergency basis) a legislative change that waived competitive bidding in favor of Intralot.
The resulting extension of the contract, due to expire next year, encompasses a plan 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.
In February, before the Council vote, District Dig reported that the investors ratings service had downgraded the firm from a B2 to a B3 rating at the end of 2018, showing weak liquidity and declining cash flow. (News of that downgrade was first reported by columnist Colbert King of The Washington Post, on Twitter.)
The downgrade at that time “reflected 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.
The Moody’s analysis also attributed the company’s weak liquidity to its dependence on asset disposal to reverse its course. Intralot’s global portfolio of contracts was a plus, Moody’s found, and its negative cash flow outlook could be mitigated by gaining a strong foothold in the United States.
Today’s downgrade was prompted by the loss of the firm’s bid to manage the sports betting license in Turkey held by its 45% subsidiary Inteltek. That loss will weaken credit metrics including leverage and cash flow, the report says.
This could lead to a potentially unsustainable capital structure unless Intralot racks up sufficient contract wins in the next 12-18 months to enable it to refinance the company’s EUR250 million senior notes due in 2021. The contract loss in Turkey also will impede the company’s ability to renegotiate “revolving credit facilities” that are necessary as it falls short of existing covenants.
The asset disposals the company is relying on to grow its U.S.-based business portfolio continue to be a factor in the negative rating, according to the report, which cites “substantial cash leakage” through dividend payments, a limited track record of growth, regulatory and fiscal risks inherent to the gaming industry, and subdued outlooks for global growth in 2019 in Argentina and Turkey.
The recent resignation of CEO Antonios Kerastaris also was a factor, the report says.
The negative outlook could stabilize if the company improves its liquidity through new contracts that in Moody’s view would ease downward pressure and if the company could reverse its declining earnings before interest, tax, depreciation and amortization (EBITDA).
Intralot reacted to the news with a clarification that essentially says the downgrades reflect a squeeze on liquidity related to its strategic expansion in the U.S., specifically in Illinois during 2017-18. That project is expected bolster EBITDA, the company’s statement says.
The firm acknowledged its loss in Turkey while noting that it continues to have significant revenue streams from online sports betting and expects new regulation to boost its growth in the online market.
The company plans to continue to dispose of non-core assets 2019, and committed itself to meet its contractual obligations to bond holders this year by launching “next-generation products and services for lottery modernization and digital transformation while optimizing our cost structure.”
That outlook took a hit in Illinois on February 27, when CBS Chicago reported on a technical glitch that resulted in lottery tickets worth just a couple of dollars ending up worth hundreds. The glitch, which created a windfall for customers, but was fixed, ended up costing store owners money at every location that sold Illinois lottery tickets.
The snafu forced the Illinois Lottery to install new terminals all across the state, but store owners were still out the money in what a lottery spokesman called “one of the largest lottery terminal upgrades of its kind.” (Stores will have to file reimbursement claims to the Illinois Lottery, in the mail, CBS reported.)
In D.C., Intralot has struggled with aging technology and flagging revenues, but Evans and DeWitt seem optimistic that a digital overhaul and successful launch of a sports betting app will help it improve.
However, U.S. Rep. William Lacy Clay, a Democrat from Missouri, has questioned Intralot’s financial downgrades and the city’s decision to sole source the lottery and sports betting contract
“With Intralot’s failure to keep its own finances in order, I am again curious as to why would you advocate paying millions of dollars of the District’s residents to this Company for its services and trusting it to generate millions more for the District treasury through a sole source lottery and sports wagering contract,” wrote Clay, who sits on the House Oversight Committee, which has jurisdiction over the District, on February 21.
The Dig could not confirm at time of publication whether DeWitt had responded within 10 days of the letter, as Clay requested.