Companies operating in Italy’s gaming sector are having hard times. International rating agency Moody’s yesterday downgraded Gamenet‘s ratings from B1 to B2: both the corporate rating and the rating to the 200 million euros high yield bond maturing in 2018 and issued in July 2013 have been cut. A few days ago Standard&Poor’s lowered Gamenet’s corporate and bond rating to B from B+.
Gamenet is one the major gaming operators in Italy and is controlled by private equity fund Trilantic Capital Partners, led in Europe by fomer Lehman Brothers’s top manager Vittorio Pignatti Morano.
Yestarday’s rating action largely reflects Moody’s expectation that the new Italian gaming machine tax will have a negative impact on the company’s earnings leading to a deterioration of its credit metrics and will significantly weaken its liquidity profile. The action also takes into account the uncertainty related to the regulatory environment in light of the upcoming reform of the Italian gaming sector.
Moody’s also stressed that the draft reform law is still evolving and not available for final review. However, the current draft seems to include new rules for gaming machines which will result in a 20% reduction of the machine estate primarily in non-specialised locations but at the same time the obligation to replace the remaining machines within two years potentially with video lottery terminals. The reform, to be legislated in the near term, will be full in force from January 2017. Whilst the effect on Gamenet of these proposals is not yet clear, the continuing uncertainty is credit negative for the whole industry.
At the end of December 2014, the Italian Parliament required an additional 500 million euros from businesses involved in operating amusement with prizes and video lottery terminals. Based on the number of gaming machines connected to Gamenet’s network at the end of December 2014, Gamenet and the parties involved in the value chain, namely the gaming machine and point-of-sale terminal owners have to pay 47 million euros, representing two thirds of its 67 million euros reported ebitda for the last twelve months ended September 2014, when it generated about 532 million euros in revenues (see here the investors’ presentation for the 9 months in 2014).
The first instalment of 19 million is due on 30 April and the second of 28 million is due on 31 October 2015. With cash and cash equivalent resources of just over 30 million at the end of December 2014, the company’s liquidity could become very tight in case of delays or reduced collection.
