Fitch Ratings-London-22 March 2017: UK gaming companies' ratings could come under pressure if the government imposes tougher-than-expected betting restrictions on in-store gaming machines, Fitch Ratings says.

The UK government is likely to propose changes to the regulation of gaming machines in the next few months, following the completion of its triennial review. Our base case is for an incremental tightening of regulations that would mainly affect smaller, independent companies with less diversified revenue streams. But we have also considered an adverse scenario where gaming machine revenues are significantly affected.

Ladbrokes Coral and William Hill are the most exposed major gaming companies, because of their large portfolios of licenced betting offices. In our downside scenario we assume that Ladbrokes Coral would lose about 35% of gaming machine revenues, leading to FFO-adjusted net leverage remaining above our 4.0x sensitivity guidance for a downgrade for two years.

But pressure on profit margins and key credit metrics would lessen over the medium term due to changing industry dynamics. Most significantly, online betting will increase in importance as a growth driver and profit contributor as gaming operators invest in their digital platforms and improve their ability to migrate traditional retail gamblers to online channels.

The most likely outcome of the government review is a reduction in maximum stakes, which are currently GBP100 every 20 seconds, and potentially other measures to slow betting speeds. But we do not expect this to be as dramatic as the GBP2 maximum stake per spin proposed in a January report by the All Parliamentary Party Fixed-Odds Betting Terminal Group.

For more information on our expectations for the review and the potential impact on gaming companies see "Adverse Outcome from UK Gaming Machines Review Could Put Pressure on Ratings" published today and available at www.fitchratings.com or by clicking the link above.

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Simon Kennedy
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.