Rating agencies: Gaming supplier will feel economy’s pinch

By Steve Green

Thursday, June 11, 2009 | 1:55 a.m.

International Game Technology continues to be pressured by the U.S. recession as casinos buy fewer slot machines and consumers gamble less, two credit rating agencies indicated Wednesday.

Their remarks came as IGT said it's issuing $500 million in notes that mature in 2019 and will pay investors 7.5 percent annually.

IGT plans to use the money to retire other debt due in 2036 -- debt for which investors can demand that IGT redeem this year.

The slot machine maker and casino industry supplier, based in Reno, on Wednesday received a rating of BBB from Standard & Poor's on the $500 million bond offering. The debt-rating agency also affirmed its BBB corporate credit rating for IGT.

Under S&P's definitions, debt-issuers rated BBB have adequate capacity to meet financial commitments. But compared to higher-rated companies, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the company to meet its financial commitments.

Standard & Poor's maintained its negative outlook on IGT's debt.

"The negative outlook on the corporate credit rating reflects our concerns about the company's weak operating performance amid a difficult operating environment," Standard & Poor's said.

Analyst Melissa Long cited "IGT's exposure to product sales volatility, an expected weaker operating environment in the next few quarters as a result of slower replacement sales (given capital constraints affecting gaming operators), and the pullback in consumer discretionary spending affecting play levels in U.S. gaming markets.''

Standard & Poor's cited these specific factors:

-- IGT's EBITDA -- earnings before interest, taxes, depreciation and amortization -- in fiscal 2009 will decline by 20 percent to 25 percent.

-- In the first half of fiscal 2009 (the six months ended March 31), IGT reported a revenue decline of about 12 percent and an EBITDA decline of 25 percent.

-- Revenue in IGT's product sales segment fell by roughly 14 percent as a result of slower replacement sales. IGT shipped almost 13 percent fewer units in the first half of fiscal 2009 than in the prior-year period.

-- Revenue in the company's gaming operations segment fell by 10 percent, as lower play levels in U.S. gaming markets and a rise in the amount of lower-yielding machines offset a 3 percent increase in the number of units in the company's installed base.

But, Long noted, "The BBB corporate credit rating reflects IGT's strong leadership position as a manufacturer and distributor of slot machines and proprietary gaming systems, significant barriers to entry, and credit measures that are currently in line with the rating."

Also Wednesday, Moody's Investors Service assigned a Baa2 rating to the $500 million note offering and maintained its negative outlook on IGT debt.

"The note offering and a recent amendment to the company's revolving credit facility will improve IGT's liquidity profile," Moody's said in a report.

"The affirmation of IGT's ratings reflect its significant market share in casino gaming products, solid profitability, and an extensive portfolio of trademarks and intellectual property rights that support continued roll-out of new games and systems. At the same time, the ratings consider that IGT's (debt to EBITDA ratio) will likely deteriorate due to lower gaming play levels at IGT's slot machines leased to casino operators. As a result, IGT remains weakly positioned within the Baa2 rating category.

"The negative outlook reflects expected earnings decline and weakened debt protection measures over the next 12 months due to lower gaming play and reduced (machine) replacement demand," Moody's said.

Under Moody's definition, obligations in the Baa class are subject to moderate credit risk. They are considered medium-grade and may possess speculative characteristics, Moody's said.