Moody's Cuts Global Cash Access Holdings (GCA) CFR to 'B2' Following Multimedia Games Purchase

Moody's Investors Service downgraded Global Cash Access, Inc.'s (GCA) Corporate Family Rating to B2 following the announced closing of its acquisition of Multimedia Games (MGAM). This action is in line with Moody's November 14, 2014 press release when ratings for the proposed financing were assigned assuming a downgrade in the CFR should the acquisition close. At the same time, Moody's affirmed GCA's B2-PD Probability of Default Rating, its B1 senior secured bank facility rating, and its Caa1 senior unsecured note rating. Moody's also assigned a B1 rating to the company's senior secured note issuance and a Speculative Grade Liquidity rating of SGL-2, and withdrew the ratings on the company's refinanced senior secured revolver and term loan. This action concludes the review Moody's initiated on September 8, 2014, when GCA's ratings were placed under review for downgrade.

On December 19, 2014, GCA announced the completion of the acquisition of MGAM -- a manufacturer and supplier of gaming machines and systems. GCA originally announced the planned acquisition -- valued at approximately $1.2 billion -- on September 8, 2014. GCA's and MGAM's existing debt was repaid in full at the time of the transaction close and MGAM is now a wholly owned subsidiary of GCA.

Moody's has taken the following actions:

Ratings downgraded:

Corporate Family Rating to B2 from B1

Ratings affirmed:

Probability of Default Rating at B2-PD

$50 million 5-year Senior Secured Revolving Credit Facility at B1 (LGD3)

$500 million 6-year Senior Secured Term Loan B at B1 (LGD3)

$350 million 7-year Senior Unsecured Notes at Caa1 (LGD5)

Ratings assigned:

$350 million 6.25-year Senior Secured notes at B1 (LGD3)

Speculative Grade Liquidity rating of SGL-2

Ratings withdrawn:

$35 million Senior Secured Revolving Credit Facility due March 2016 at B1 (LGD3)

$96 million (outstanding) Senior Secured Term Loan B due March 2016 at B1 (LGD3)

The outlook was changed from rating under review to stable.

RATINGS RATIONALE

The B2 Corporate Family Rating considers GCA's significant leverage resulting from acquisition financing. On close, Moody's estimates that GCA will have pro forma debt/EBITDA of approximately 6.0x -- including consideration of approximately $30 million of cost synergies. Without these synergies, leverage is estimated at approximately 7.0x. This represents a material increase from GCA's standalone leverage of about 1.6x for the LTM period ended September 30, 2014. Moody's expects that leverage will improve somewhat over the near term, as an estimated $50 million of positive free cash flow over the next 12 months can be applied towards debt reduction beyond required amortization. However, Moody's estimates that debt/EBITDA would remain above 5.5x under such a scenario, which is still high at the B2 rating given the current challenges facing the gaming industry. The rating also reflects the company's small scale relative to rated peers in terms of revenue and integration risk as the company enters the highly competitive gaming device, content and systems market. While GCA has a track record of executing smaller acquisitions, the transformative nature of the MGAM acquisition introduces meaningful integration risk as well, with regards to (amongst other issues) attaining projected cost synergies.

Notwithstanding these concerns, the acquisition will expand and diversify GCA's customer and revenue base while enhancing the company's scale in an intensely competitive gaming supply industry and broadening its product scope. MGAM continues to experience robust increases in participation revenue largely as a result of the continued expansion of the domestic installed player terminal base. GCA will see margin improvement as it acquires a company that has operating margins of about 27%, compared to GCA's margins of about 8%. Although not included in Moody's projections, cross-selling opportunities for gaming devices and systems into GCA's existing customer base have the potential to expand MGAM's market share -- particularly when the two largest players in the market are working through large acquisitions of their own -- which would lead to further increases in participation revenue. Moody's considers the cost synergies that management has targeted to be mostly achievable, because they relate primarily to the elimination of duplicative public company-related costs and gaining efficiencies in the individual manufacturing and assembly processes (for cash-access devices and gaming equipment). However, our expectation of continued softness in the gaming sector and slower replacement cycles for gaming machines poses a significant challenge for the growth prospects of the combined business.

The stable rating outlook assumes growth in MGAM's Gaming Operations will be sufficient to offset weakness in cash advance and ATM revenue -- which will account for more than 60% of revenues and 30% of earnings post-acquisition -- and mitigate potential volatility in MGAM's Machine Sales business. The stable outlook also assumes that the combined company will apply the majority of its free cash flow to debt reduction beyond any mandatory amortization resulting in debt/EBITDA decreasing to between 5.0x and 5.5x by the end of fiscal 2016.

GCA's Speculative Grade Liquidity rating of SGL-2 reflects its good liquidity. Moody's expects GCA will generate about $50 million of free cash flow over the next 12 months after its interest, taxes, required debt amortization and capital expenditure needs. Cash balances (after settlement liabilities and receivables) are expected to be modest at about $15 million. GCA has access to a $50 million revolver that expires in 2019 which we do not expect to be materially drawn over the next 12 months. GCA's credit agreement calls for a maximum secured leverage test which Moody's expects will have adequate cushion.

The B2 Corporate Family Rating could be lowered if there is further deterioration in GCA's legacy cash services business such that it appears that the company will not be able to reduce and maintain debt/EBITDA below 6.0 times by the end of calendar year 2016. A higher rating would require GCA to achieve and maintain debt/EBITDA of about 4.5 times and maintain its good liquidity profile.

The principal methodology used in these ratings was Global Gaming Industry published in June 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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