The outlook on Flutter Entertainment’s (OTC:PDYPY) “BBB-” credit grade was lifted to “stable” from “negative” by Fitch Ratings, which sees the gaming company prioritizing its balance sheet.
The research firm also boosted its grade on the operator’s senior secured instruments issued by Stars Group Holdings to “BBB” from “BBB-”, saying that’s indicative of “the maintenance of low priority leverage.” Bonds rated “BBB-” by Fitch and S&P carry the lowest investment grade. Flutter acquired The Stars Group (TSG) last year for $12.2 billion, creating the world’s largest online gaming company.
The revision of the Outlook to Stable reflects our view that Flutter’s diversification and strong cash flow generation enhance its capacity to absorb future regulatory challenges,” said the ratings agency.
“Fitch forecasts showing stabilized revenue levels for online gaming and betting activities post-pandemic should accelerate deleveraging towards levels commensurate with the rating over the next two years,” the agency continued.
Flutter’s investment-grade rating is bolstered by ownership of TSG, which provides complimentary assets in some markets while delivering substantial scale, according to Fitch. The UK-based operator is also the parent company of FanDuel, the largest online sportsbook in the US.
Flutter Could Be Quick to Shore Up Balance Sheet
In the hyper-competitive US sports betting market, operators are spending heavily on customer acquisition and marketing – often in the name of profitability.
While FanDuel controls roughly a third of the domestic online sports wagering market and holds dominant positioning in daily fantasy sports (DFS) while being home to a fast-growing online casino unit, big expenditures are necessary to fortify those businesses. That can create some strain on balance sheets — something Fitch believes Flutter will rapidly deal with.
“Elevated consolidated debt levels and large cash outlays tied to expanding the US sports-betting business have led to weaker forecast leverage metrics for 2021-2022. But a conservative financial policy and strong cash flow generation capacity should allow rapid deleveraging by 2023,” said the ratings agency.
However, the research firm forecasts elevated marketing spending in the US by Flutter this year and in 2022, as more states join the regulated sports wagering lineup.
Risks to Flutter Thesis
FanDuel probably doesn’t turn positive on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA) margins until 2025. But doing so ahead of that forecast could accelerate Flutter deleveraging efforts, notes Fitch.
The ratings agency adds Flutter faces some risk from its lengthy legal spat with the state of Kentucky relating to online poker litigation. The state is adamant about collecting the $1.3 billion courts say it’s entitled to.
“We would consider full payment under the Kentucky case as event risk and it would postpone reaching leverage targets for another 12 months, according to the Fitch case. However, we do not expect that liquidity will be threatened under this worst-case scenario,” said the credit grader.
Flutter is forecast to have $1.38 billion in cash at the end of the second quarter, and it faces no looming debt maturities until 2025.
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