Decline in Light & Wonder Leverage Persists

On November 24, 2023, Fitch Ratings affirmed Light & Wonder’s credit grade of “BB” with a “stable” outlook, citing the company’s efforts to reduce leverage as a contributing factor. The gaming device manufacturer’s free cash flow (FCF) margins are outpacing those of comparable firms, and its leverage profile is becoming more conservative. The recent reacquisition of social casino developer SciPlay added to the company’s leverage but did not significantly impact its credit profile.

Light & Wonder’s earnings before interest, taxes, depreciation, and amortization (EBITDA) dropped to 4.3x at the end of last year and are expected to further decline to 3.7x by the end of 2023, indicating that the company’s debt-reduction plans are paying off. In 2021, the company formerly known as Scientific Games sold its lottery and sports betting units, raising approximately $7 billion in cash and reducing debt significantly. This move was positively received by Wall Street and simplified Light & Wonder’s investment thesis.

Fitch expects the company’s strong FCF generation and liquidity to keep its EBITDA leverage metrics consistent with the “BB” rating. With the capacity to repurchase at least another $200 million worth of its own shares and the likelihood of large acquisitions being low over the near-term, Light & Wonder could make progress in getting its leverage down to its desired range of 2.5x to 3.5x. The company also has plans to boost its footprint in the digital gaming industry, which is a higher growth segment.

Data indicates that Light & Wonder’s acquisition of SciPlay has been beneficial, with a growth in monthly payer users despite a decrease in monthly active users. The focus on introducing new content, features, and live events in its games has resulted in a higher payer conversion rate. Digital gaming is competitive and volatile, but the company’s strong FCF generation can help mitigate some of those risks.