RBC RBC Bearings Incorporated

A leading global designer, developer and manufacturer of gaming machines and systems products, International Game Technology (IGT) signed a new five-year credit facility with a syndicate of banks worth $750.0 million.

The credit facility replaces IGT’s existing facility of $1.24 billion. It also carries a lower interest rate than the existing one. As of April 14, 2011, there were no outstanding borrowings under the existing credit facility.

Initially, IGT will be charged a rate equal to LIBOR plus 122.5 basis points on borrowings and facility fee equal to 27.5 basis points, at the Baa2/BBB pricing level.

Later, the facility fee and interest rate will be adjusted according to IGT’s debt rating of senior unsecured debt or Net Funded Debt to EBITDA, whichever is more favorable to the company.

IGT expects to extend the size of the credit facility by $250.0 million during its five-year tenure.

Premier Banks including Wells Fargo Securities, a division of Wells Fargo & Company (WFC) and RBS Securities Inc. of Royal Bank of Scotland Group plc (RBC) acted as Joint Lead Arrangers and Joint Book Runners for the transaction.

IGT’s balance sheet remains highly leveraged. As of December 31, 2010, long-term debt was $1.57 billion versus $1.67 billion in the prior quarter. Debt-to-total capital ratio was 40.0%.

With a net debt position (debt less cash) of $4.40 per share, the investment risk remains high for the company.

We believe substantial indebtedness and higher cost of borrowing may limit the company’s ability to raise funds going forward.

As a result of high debt, IGT curtailed its share repurchase program in 2009 and 2010; although it continues to have 7.7 million shares under the existing share repurchase authorization.

Recommendation

We maintain our Neutral rating over the long term (6-12 months). We believe IGT is focused on reducing its dependence on the domestic machine replacement cycle.

We consider this a prudent strategy for bringing consistency to its top-line growth and increasing earnings visibility going forward. The current product pipeline reflects strong growth expectations from non-machine revenues in systems; intellectual property and new games/software.

However, top-line growth remains elusive and we believe that lack of visibility in replacement sales, very few new openings, higher debt levels and increasing competition, especially from Scientific Games Corp. (SGMS) will remain primary growth headwinds for 2011.

Currently, International Game Technology has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

 
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