Investing.com -- Moody’s Ratings has upgraded the rating of Aristocrat Leisure Ltd (Aristocrat) to investment grade, assigning a Baa3 long-term issuer rating today. The previous Ba1 long term corporate family rating has been withdrawn. Along with the upgrade, the outlook for the company has been changed to stable from positive.

The upgrade reflects Aristocrat’s solid operating performance, strong cash flow, and conservative financial policies. Moody’s expects the company to manage its growth spending and shareholder returns prudently, maintaining its credit metrics at strong levels for the rating. Aristocrat has a publicly declared net leverage target of 1.0x-2.0x over the medium term.

Aristocrat’s credit profile benefits from its strong market presence and diversified geographical distribution. The company’s premium gaming operations and digital businesses, which generate a high proportion of recurring revenue, support earnings stability. Despite exposure to potential macroeconomic weakness in the US and a slowdown in discretionary spending, Aristocrat is well positioned to withstand these risks due to its leading market position, premium titles, and geographically diversified operations. Aristocrat’s globally diversified supply chain and machine assembly centers in the US, Australia, and Spain provide manufacturing flexibility.

For the six months ending 31 March 2025, Aristocrat’s results were largely in line with expectations. EBITDA growth was driven by net additions in the US installed base, strong performance in Product Madness, and earnings from the company’s NeoGames acquisition. Moody’s adjusted gross debt/EBITDA reduced to 0.9x in the twelve months to 31 March 2025, supported by debt reduction following the repayment of the Term Loan B (TLB). Absent significant M&A, leverage is expected to remain low at around 0.8x-1.0x over the next 12-18 months.

Moody’s expects Aristocrat to use its strong balance sheet to continue to grow inorganically, particularly within its gaming operations and real money gaming segments, and potentially use debt to fund acquisitions within the next few years. The company aims to grow its RMG business, Aristocrat Interactive, to USD1 billion of revenue by fiscal 2029. Any transactions are expected to be funded in a way that preserves credit metrics commensurate with the Baa3 rating.

The upgrade also reflects Moody’s expectation that Aristocrat will transition to a fully unsecured capital structure following the repayment of the TLB. The company is in the process of formalising a collateral release with counterparties. The transition to an unsecured capital structure supports the company’s financial flexibility, demonstrating the improvement in financial profile over time.

The rating is constrained by Aristocrat’s exposure to the cyclical nature of the gaming industry, which is dependent on discretionary consumer spending. The rating also considers the execution risks associated with the company’s expansion into RMG.

The stable outlook reflects Moody’s expectation that Aristocrat will maintain strong credit metrics with solid headroom against parameters set for the rating over the next 12-18 months. The outlook also reflects the company’s excellent liquidity profile and strong access to capital.

Possible factors for a future upgrade include the company’s operating profile stabilizing after recent acquisitions and disposals, and clarity around potential acquisitions expected in the next few years. An upgrade could also occur if the company maintains its strong market share in gaming operations and successfully executes on its expansion into real money gaming, while sustaining steady operating margins and solid free cash flow generation.

A downgrade could occur if the company’s operating conditions deteriorate, future acquisitions cause leverage to increase, liquidity weakens, or there is a material deviation from the company’s stated financial policies. Specifically, debt/EBITDA sustained above 3.0x would also lead to a downgrade.

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