(The following statement was released by the rating agency)
MILAN/LONDON, May 16 (Fitch) Fitch Ratings has upgraded Gala Coral Group Ltd's
(Gala) subsidiary Gala Group Finance plc's GBP350m senior secured notes to 'BB'
from 'BB-' and to 'RR1' from 'RR2'. The agency has simultaneously affirmed Gala
Coral Group Ltd's Long-term Issuer Default Rating (IDR) at 'B' and Gala's
subsidiary Gala Electric Casinos plc's senior notes 'CCC+' rating and Recovery
Rating of 'RR6'. The Outlook on Gala's IDR remains Stable.
The upgrade of Gala's senior secured notes reflects the expectation of increased
recovery to between 91% and 100% following the application of GBP113m of GBP175m
net proceeds from the divestment of Gala's casino business to pre-payment of
Gala's GBP825m Term Loan B. Term Loan B ranks pari passu with the senior secured
notes. Both instruments enjoy guarantees and share pledges of subsidiaries
accounting for over 80% of group EBITDA and gross assets. Consistently with
Fitch's methodology, the materiality of the security package and the high
expected recovery allow a three-notch uplift from Gala's IDR.
At the same time, Fitch has affirmed Gala's IDR. As noted in its May 2012
comment 'Fitch: No Rating Impact on Gala Coral from Casino Disposal' at
www.fitchratings.com, the agency believes the divestment will provide benefits
in terms of improving Gala's chances of focusing resources on fewer core
businesses. It also allows it to pay down some debt. However, Gala's leverage is
still high and execution risks in its turnaround remain.
KEY RATING DRIVERS
Free Cash Flow Improvements
Gala reported mildly negative free cash flow (FCF) of GBP2.8m in FY12 due to
increased capex and higher restructuring costs. However Fitch expects both of
these to decline from FY13, and coupled with better profitability, to lead to
increasing FCF. Fitch projects that Gala's FY13 net lease adjusted funds from
operations (FFO)-based leverage (calculated including PropCo debt) should drop
to between 6.0x and 6.2x (from FYE12's 6.3x) thanks to positive FCF and the
disposal of Gala Casinos. This however remains high for Gala's 'B' rating.
In December 2012, Fitch revised the Outlook of Gala's IDR to Stable from
Negative reflecting the improved competitive profile of its bingo and
high-street betting units. The turnaround plan launched in late 2010 has started
to bear fruit with Gala reporting mild organic growth for
financial-year-to-September-2012 (FY12) group turnover, gross profit and EBITDA
after five years of decline.
Execution risks remain in Gala's turnaround process. In addition, the gaming
industry remains exposed to a fast pace of innovation and particularly fierce
competition in the online sphere. These risks are mitigated by the company's
enhanced innovation ability and pipeline.
After gradually losing market share to peers William Hill and Ladbrokes, Coral's
performance has improved in FY12, although it is still lagging as competitors
have also strengthened. For FY12 Coral's over-the-counter gross win margin grew
to 17.3% (FY11: 16.4%) and was better than Ladbrokes' 16.7%, though not as
strong as William Hill's 18.2%. Average gross win per machine per week over FY12
grew to GBP920 (GBP887), marginally better than to William Hill (GBP911) but
weaker than Ladbrokes (GBP946). Fitch expects further improvements in Coral's
machine estate from the forthcoming roll out of Global Draw's new cabinets.
Bingo Performance Maintained
Admissions declined in FY12 due to the reduction of free bingo and partly
because of softer consumer spending. This, however, has been offset by an
improvement in spending per head as well as improved margins across all product
groups, which offset increased costs to achieve a divisional EBITDA of GBP69m,
excluding week 53 (up 17% yoy). Fitch expects attendance to remain under
pressure, but further scope to increase spending and margins will enable further
Online Replatforming On Plan
2012 saw the re-launch of galacasino.com and galabingo.com. Both have shown
improvements in key performance indicators, albeit from a low base. EBITDA at
FYE12 for Interactive was close to GBP26m, marginally up year on year. Fitch
expects only marginal improvements in profitability for FY13 as top-line growth
will be achieved through increased marketing costs and these will weigh on
Negative: Future developments that could lead to negative rating action include:
- EBITDA failing to maintain a trajectory of moderate growth
- FCF close to zero
- Net lease adjusted FFO-based leverage higher than 6.5x on a sustained basis
- Gross lease adjusted FFO-based leverage remaining higher than 7.0x on a
Positive: Future developments that could lead to positive rating action include:
- Net lease adjusted FFO-based leverage falling below 5.0x on a sustained basis
- Gross lease adjusted FFO-based leverage falling below 6.0x on a sustained
+44 20 3530 1123
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Fitch Italia SpA
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+44 20 3530 1021
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
Additional information is available at www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
Applicable criteria, 'Corporate Ratings Methodology', dated 9 August 2012 is
available at www.fitchratings.com.
Applicable Criteria and Related Research
Corporate Rating Methodology
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