Cirsa Gaming Corporation
Cash Flow Model: Cirsa Liquidity Sufficient Assuming Current Reopening Expectations; Base Case Distributable Value of €2.9B Fully Covers HoldCo PIK Notes; 2023 Leverage to Decline to Pre-Pandemic Levels; Uncertainty About Covid-19 Restrictions Remains
Mon 06/07/2021 08:22 AM
Relevant Items:
Cash Flow Model (Reorg’s Analysis Page)
7.25%/8.00% SSN PIK 2025 OM (Oct. 7, 2019)
E+3.625% SSFRN 2025 OM (Aug. 6, 2019)
4.75% SSN 2025 OM (May 22, 2019)
6.25% SSN 2023 & 7.875% SSN 2023 OM (June 22, 2018)
Q1’21 Result
Q4’20 Result
FY’20 Report
Spanish gaming company Cirsa is expected to maintain sufficient liquidity to run its business based on current expectations about reopening and no further lockdowns. Reorg’s base case model, which assumes a return to full capacity by the third quarter of 2022, estimates liquidity of €136 million at the end of 2021 and €123 million at the end of 2022. This implies excess liquidity of about €66 million at the end of 2021 and €53 million at the end of 2022 on top of the €70 million minimum operating cash balance required to run operations.
The liquidity projections assume full repayment of the €55 million RCF due Dec. 31, 2021, and assume Cirsa PIKs the interest on its 7.25% HoldCo PIK notes until the first half of 2022. As of March 31, the group’s liquidity stood at €281.6 million, including cash of €267.4 million (including the €70 million of minimum operating cash) and unused credit lines of €14.2 million.
A summary chart for the group’s expected liquidity is below:
Given sufficient liquidity, we do not expect the group to incur additional priming or dilutive debt, although it has substantial headroom to incur such debt as shown in the section ‘Debt Baskets’ below. Under this assumption, Reorg projects the group’s senior secured notes and HoldCo PIK notes to be fully covered under the base and high cases. The recovery on the HoldCo PIK notes falls to 83% under the low case. It should be noted that these recovery and liquidity projections are based on current expectations about reopening, however uncertainty about ever-changing Covid-19 restrictions remains, and could impact recovery and liquidity projections.
The HoldCo PIK notes are currently trading at 97.6 to yield 9.7%, according to Solve Advisors. It should also be noted that Cirsa's sponsor Blackstone bought €120 million of HoldCo PIK notes when they were trading in the 40s, after which they rose almost 15 points. Given the substantial increase in the price of PIK notes since then to about 98 currently, the sponsor may be looking to sell them to capture the capital gain. A sale of a substantial portion of PIK notes could result in a downward pressure on the price.
Reorg’s base case uses a pre-IFRS 16 terminal EBITDA of €473 million and applies a conservative multiple of 5.5x to arrive at a terminal value. The 5.5x multiple is reflective of the comparable transactions in the gaming sector, as shown below. Blackstone acquired Cirsa at a 6.5x pro forma EBITDA multiple in 2018. Base case distributable value was estimated at €2.913 billion.
In our base case, Cirsa generates €45 million of levered free cash flow in 2022 and €56 million in 2023, and €186 million of unlevered free cash flow in 2022 and €213 million in 2023, assuming it resumes paying cash interest on the PIK note from the second half of 2022.
Summary tables of the group’s levered and unlevered FCF after leases are below:
Net leverage on pre-IFRS 16 basis excluding the PIK notes is expected to recover to the pre-pandemic level of 4.5x at the end of 2023 under the base case. Reorg expects the group to be able to successfully refinance the €663 million 6.25% 2023 senior secured notes and $495 million 7.875% 2023 senior secured notes both of which mature on Dec. 20, 2023. These notes are currently trading at 101.7 and 102.2 respectively, according to Solve Advisors, compared with call prices of 101.56 and 101.97 respectively, callable on June 20, 2021.
Net leverage including the PIK notes is expected to recover to 5.5x at the end of 2023 in the base case, which could be considered high given 5.5x to 6x EBITDA valuation multiples used for other retail gaming names.
The group’s expected pre-IFRS 16 net debt and net leverage is below:
A capital structure of the group is below:
Reorg’s valuation model for Cirsa is calculated on a pre-IFRS 16 basis. Under the base case scenario, discounted terminal value is derived at €2.247 billion based on terminal EBITDA of €472.5 million, a multiple of 5.5x and WACC of 5.7%.
The model also projects discounted unlevered free cash flow of €37 million, €174 million and €188 million for 2021, 2022 and 2023, respectively. Based on this, the enterprise value of the group is projected at €2.646 billion. Base case distributable value is €2.914 billion after adding back €267.4 million cash as of March 31.
Base case sensitivity tables for distributable value and recovery rate are below:
Reorg’s base case assumes that operations will return to full capacity in the third quarter of 2022. The low case assumes returning to full capacity in the fourth quarter of 2022 and the high case by the second quarter of 2022.
Revenue is modeled using revenue per slot for the Slot and Casinos divisions, and revenue per bingo hall for the Bingo division, adjusted for different restrictions across regions. Growth rate assumptions for B2B and online divisions and revenue per operating unit are based on the 2020 European gaming report from European Gaming and Betting Association (EGBA).
A summary of assumptions for operating capacity and revenue per unit in each region under the base case is below:
As of May 17, operations in Italy and Morocco remained fully closed. A summary table for the group’s operating situation as of May 17 is below:
Reorg’s model also assumes a full repayment of the €55 million RCF due at year end 2021, while we assume the group’s 2023 maturities will be refinanced. The model also assumes that the group will start to pay cash interest on the PIK notes from July 15, 2022 as operating capacity starts to normalize.
Out of its €61.7 million tax deferrals as of March 31, €14.5 million came from Italy and is expected to be repaid in May and June. Regarding its remaining deferred taxes in Spain, the group said it could keep them at about €50 million, but as the group has better visibility of its operations and cash generation in the coming months, it could decide to lower this balance given deferrals would incur about 3.75% of financing cost. Therefore, under our base case, tax deferrals are modeled with an interest rate of 3.75% and €14.5 million is projected to be repaid in the second quarter of 2021, with the remainder repaid periodically starting from the first quarter of 2022 until the third quarter of 2022 under base case.
Projected quarterly revenue and EBITDA are below:
A summary table for base case expected revenue, EBITDA and margin is below:
EBITDA margin is expected to recover to above the full-year 2019 level of 25% in the 2022 year and the 2023 year driven by cost-reduction measures in response to Covid-19.
The group said it started to generate positive free cash flow (after financial interest charges and capitalized lease payments) in March, driven by €23 million of EBITDA and low capital expenditure.
A summary of base case key financials is below:
A historical EBITDA geographical breakdown is below:
A summary chart for historical segment revenue breakdown and segment EBITDA margin is below:
A business overview of Cirsa can be found in Reorg’s previous tear sheet analysis HERE.
The operating group has issued four senior secured notes due 2023 and 2025, equivalent to €1.962 billion. It also issued €275 million of super senior bank facilities, including a €200 million RCF due 2025, a €55 million RCF due 2021 and a €20 million term loan due 2025. These bank facilities rank super senior in enforcement to the senior secured notes. The group also has a €23 million in ICO-guaranteed loans, which rank pari passu to the existing senior secured notes.
The senior secured notes and super senior facilities enjoy the same security collateral, being the entire issued capital stock of Cirsa Finance International, Cirsa Enterprises, Cirsa Gaming Corp SA and certain subsidiaries, as well as certain material long-term intra-group receivables, operating bank accounts and monetary rights.
At the holding level, €432.6 million of outstanding senior secured HoldCo PIK toggle notes due 2025 was issued by LHMC Finco 2 Sarl, which sits outside of the restricted group of senior secured notes, to make a dividend distribution to Blackstone. As the HoldCo doesn’t have its own operations, the OpCo’s cash flows are expected to be upstreamed to pay the coupon and principal of the PIK notes. The group has said it is unlikely to pay cash coupon until mid-2021.
The RCF covenant requires Cirsa Finance’s senior secured first lien leverage ratio to not exceed 7.52x if the utilization exceeds 40% of total amount. Cirsa is permitted to prevent or cure breaches following cash receipt of any new equity or permitted subordinated shareholder debt as if EBITDA shall be increased by the amount of that new equity or subordinated shareholder debt. It should be noted that breaching the specified financial covenant will result only in a drawstop event and not an event of default.
Covenants for the senior secured notes allow significant dilutive and priming debt as per Reorg’s calculations below. The group had no headroom left under its €275 million credit facility basket in accordance with its 2025 and 2023 senior secured notes documentation, after it announced a super senior €20 million five-year term loan facility with Sculptor Capital in June.
However, Reorg’s calculations as of March 31 show the group can incur:
-- Shenda Xu, Noor Sehur
Cash Flow Model (Reorg’s Analysis Page)
7.25%/8.00% SSN PIK 2025 OM (Oct. 7, 2019)
E+3.625% SSFRN 2025 OM (Aug. 6, 2019)
4.75% SSN 2025 OM (May 22, 2019)
6.25% SSN 2023 & 7.875% SSN 2023 OM (June 22, 2018)
Q1’21 Result
Q4’20 Result
FY’20 Report
Spanish gaming company Cirsa is expected to maintain sufficient liquidity to run its business based on current expectations about reopening and no further lockdowns. Reorg’s base case model, which assumes a return to full capacity by the third quarter of 2022, estimates liquidity of €136 million at the end of 2021 and €123 million at the end of 2022. This implies excess liquidity of about €66 million at the end of 2021 and €53 million at the end of 2022 on top of the €70 million minimum operating cash balance required to run operations.
The liquidity projections assume full repayment of the €55 million RCF due Dec. 31, 2021, and assume Cirsa PIKs the interest on its 7.25% HoldCo PIK notes until the first half of 2022. As of March 31, the group’s liquidity stood at €281.6 million, including cash of €267.4 million (including the €70 million of minimum operating cash) and unused credit lines of €14.2 million.
A summary chart for the group’s expected liquidity is below:
Given sufficient liquidity, we do not expect the group to incur additional priming or dilutive debt, although it has substantial headroom to incur such debt as shown in the section ‘Debt Baskets’ below. Under this assumption, Reorg projects the group’s senior secured notes and HoldCo PIK notes to be fully covered under the base and high cases. The recovery on the HoldCo PIK notes falls to 83% under the low case. It should be noted that these recovery and liquidity projections are based on current expectations about reopening, however uncertainty about ever-changing Covid-19 restrictions remains, and could impact recovery and liquidity projections.
The HoldCo PIK notes are currently trading at 97.6 to yield 9.7%, according to Solve Advisors. It should also be noted that Cirsa's sponsor Blackstone bought €120 million of HoldCo PIK notes when they were trading in the 40s, after which they rose almost 15 points. Given the substantial increase in the price of PIK notes since then to about 98 currently, the sponsor may be looking to sell them to capture the capital gain. A sale of a substantial portion of PIK notes could result in a downward pressure on the price.
Reorg’s base case uses a pre-IFRS 16 terminal EBITDA of €473 million and applies a conservative multiple of 5.5x to arrive at a terminal value. The 5.5x multiple is reflective of the comparable transactions in the gaming sector, as shown below. Blackstone acquired Cirsa at a 6.5x pro forma EBITDA multiple in 2018. Base case distributable value was estimated at €2.913 billion.
In our base case, Cirsa generates €45 million of levered free cash flow in 2022 and €56 million in 2023, and €186 million of unlevered free cash flow in 2022 and €213 million in 2023, assuming it resumes paying cash interest on the PIK note from the second half of 2022.
Summary tables of the group’s levered and unlevered FCF after leases are below:
Net leverage on pre-IFRS 16 basis excluding the PIK notes is expected to recover to the pre-pandemic level of 4.5x at the end of 2023 under the base case. Reorg expects the group to be able to successfully refinance the €663 million 6.25% 2023 senior secured notes and $495 million 7.875% 2023 senior secured notes both of which mature on Dec. 20, 2023. These notes are currently trading at 101.7 and 102.2 respectively, according to Solve Advisors, compared with call prices of 101.56 and 101.97 respectively, callable on June 20, 2021.
Net leverage including the PIK notes is expected to recover to 5.5x at the end of 2023 in the base case, which could be considered high given 5.5x to 6x EBITDA valuation multiples used for other retail gaming names.
The group’s expected pre-IFRS 16 net debt and net leverage is below:
A capital structure of the group is below:
Assumptions, Sensitivity Analysis, Model Output
Reorg’s valuation model for Cirsa is calculated on a pre-IFRS 16 basis. Under the base case scenario, discounted terminal value is derived at €2.247 billion based on terminal EBITDA of €472.5 million, a multiple of 5.5x and WACC of 5.7%.
The model also projects discounted unlevered free cash flow of €37 million, €174 million and €188 million for 2021, 2022 and 2023, respectively. Based on this, the enterprise value of the group is projected at €2.646 billion. Base case distributable value is €2.914 billion after adding back €267.4 million cash as of March 31.
Base case sensitivity tables for distributable value and recovery rate are below:
Reorg’s base case assumes that operations will return to full capacity in the third quarter of 2022. The low case assumes returning to full capacity in the fourth quarter of 2022 and the high case by the second quarter of 2022.
Revenue is modeled using revenue per slot for the Slot and Casinos divisions, and revenue per bingo hall for the Bingo division, adjusted for different restrictions across regions. Growth rate assumptions for B2B and online divisions and revenue per operating unit are based on the 2020 European gaming report from European Gaming and Betting Association (EGBA).
A summary of assumptions for operating capacity and revenue per unit in each region under the base case is below:
As of May 17, operations in Italy and Morocco remained fully closed. A summary table for the group’s operating situation as of May 17 is below:
Reorg’s model also assumes a full repayment of the €55 million RCF due at year end 2021, while we assume the group’s 2023 maturities will be refinanced. The model also assumes that the group will start to pay cash interest on the PIK notes from July 15, 2022 as operating capacity starts to normalize.
Out of its €61.7 million tax deferrals as of March 31, €14.5 million came from Italy and is expected to be repaid in May and June. Regarding its remaining deferred taxes in Spain, the group said it could keep them at about €50 million, but as the group has better visibility of its operations and cash generation in the coming months, it could decide to lower this balance given deferrals would incur about 3.75% of financing cost. Therefore, under our base case, tax deferrals are modeled with an interest rate of 3.75% and €14.5 million is projected to be repaid in the second quarter of 2021, with the remainder repaid periodically starting from the first quarter of 2022 until the third quarter of 2022 under base case.
Projected quarterly revenue and EBITDA are below:
A summary table for base case expected revenue, EBITDA and margin is below:
EBITDA margin is expected to recover to above the full-year 2019 level of 25% in the 2022 year and the 2023 year driven by cost-reduction measures in response to Covid-19.
The group said it started to generate positive free cash flow (after financial interest charges and capitalized lease payments) in March, driven by €23 million of EBITDA and low capital expenditure.
A summary of base case key financials is below:
A historical EBITDA geographical breakdown is below:
A summary chart for historical segment revenue breakdown and segment EBITDA margin is below:
A business overview of Cirsa can be found in Reorg’s previous tear sheet analysis HERE.
Organization Chart, Structural Concerns
The operating group has issued four senior secured notes due 2023 and 2025, equivalent to €1.962 billion. It also issued €275 million of super senior bank facilities, including a €200 million RCF due 2025, a €55 million RCF due 2021 and a €20 million term loan due 2025. These bank facilities rank super senior in enforcement to the senior secured notes. The group also has a €23 million in ICO-guaranteed loans, which rank pari passu to the existing senior secured notes.
The senior secured notes and super senior facilities enjoy the same security collateral, being the entire issued capital stock of Cirsa Finance International, Cirsa Enterprises, Cirsa Gaming Corp SA and certain subsidiaries, as well as certain material long-term intra-group receivables, operating bank accounts and monetary rights.
At the holding level, €432.6 million of outstanding senior secured HoldCo PIK toggle notes due 2025 was issued by LHMC Finco 2 Sarl, which sits outside of the restricted group of senior secured notes, to make a dividend distribution to Blackstone. As the HoldCo doesn’t have its own operations, the OpCo’s cash flows are expected to be upstreamed to pay the coupon and principal of the PIK notes. The group has said it is unlikely to pay cash coupon until mid-2021.
The RCF covenant requires Cirsa Finance’s senior secured first lien leverage ratio to not exceed 7.52x if the utilization exceeds 40% of total amount. Cirsa is permitted to prevent or cure breaches following cash receipt of any new equity or permitted subordinated shareholder debt as if EBITDA shall be increased by the amount of that new equity or subordinated shareholder debt. It should be noted that breaching the specified financial covenant will result only in a drawstop event and not an event of default.
Debt Baskets
Covenants for the senior secured notes allow significant dilutive and priming debt as per Reorg’s calculations below. The group had no headroom left under its €275 million credit facility basket in accordance with its 2025 and 2023 senior secured notes documentation, after it announced a super senior €20 million five-year term loan facility with Sculptor Capital in June.
However, Reorg’s calculations as of March 31 show the group can incur:
- Up to €1.125 billion of structurally senior debt, which includes €580 million of additional debt incurred under the debt covenant (shown as permitted debt baskets and additional debt baskets in the chart below) and €545 million of investments in unrestricted subsidiaries via the restricted payments covenant;
- Up to €605 million of effectively senior debt secured on assets that do not secure the senior secured notes; and
- Up to €755 million in dilutive debt with permitted collateral liens.
-- Shenda Xu, Noor Sehur
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