Risk-to-Price Commentary

from Global Markets Intelligence

Ladbrokes PLC

RISK-TO-PRICE SCORE ISIN Ticker LAD XS0491875562

Q1
Fabrice F Jaudi Vice President Global Markets Intelligence (44) 20-7176-8312 fabrice.jaudi@spcapitaliq.com Vikas B. Suresh Senior Lead Global Markets Intelligence +91 040-4466-8866 x 2645 svikas@spcapitaliq.com

105

Bond Selection And Technicals

In our July 26, 2013, review of the European consumer discretionary sector, the Global Markets Intelligence (GMI) team identified the 'BB' rated Ladbrokes 7.625% senior unsecured bond, maturing March 5, 2017, as offering good risk-adjusted returns relative to other bonds with a similar profile. The note had a Risk-to-Price (R2P) score of 105, ranking in the first quartile, exceeding the subsector's average (see table 1).
Table 1

R2P Score Ranking History

--Ladbrokes PLC 7.625% 5/3/2017-Period The S&P Capital IQ Global Markets Intelligence group, formerly known as the S&P Valuation and Risk Strategies research group, is analytically and editorially independent from any other analytical group at S&P. The objective of this group is to provide unique financial intelligence by analyzing relationships across multiple asset classes and markets. Enabled with cutting-edge S&P Capital IQ and third-party applications and data, the group offers investors valuable new sources for alpha discovery and "out-of-the-box" thinking through robust data exploration and analysis. The research provides investors with actionable and topical market perspectives that can offer innovative ways to leverage credit and risk intelligence. Quartile Percentile Rating Subsector average percentile*

One year Six months Three months One month One week One day

1 1 1 1 1 1

96 BB 93 BB 77 BB 98 BB 97 BB 97 BB

68 67 61 69 67 66

*Consumer services subsector. Source: S&P Capital IQ.

The bond's probability of default (PD), currently 0.01%, has remained lower than both the consumer services subsector and consumer discretionary sector's, currently 0.05% and 0.1% respectively, over the last 12 months. The bond's historical 20-day price volatility (BP Vol.) has generally been lower than the sector and subsector's over the last month, falling from its high of 0.44% three months ago. The current BP Vol. is 0.19%, below the subsector average of 0.27% and the sector average of 0.21%. The bond has an option-adjusted spread (OAS) of 241 basis points (bps), wider than the subsector average of 131 bps and sector average of 121 bps (see charts 1-4). The note offers a yield of 3.9% and duration of 3.2 years.

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 1

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 2

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 3

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 4

Ladbroke's share price has increased 33% over the last year, outperforming the S&P Europe 350 Consumer Discretionary Index's 27% gain (see chart 5). In our R2P analysis, we have observed an inverse correlation between equity price and obligor PD, whereby an increase in share price can lead to a lower PD and, subsequently, a higher relative rank for an issuer's bonds.

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 5

Over the same period, the Ladbrokes 7.625% 2017 bond's price has increased by 4% (see chart 6).

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 6

Issuer Analysis And Credit Metrics

Ladbrokes PLC, the U.K. based betting and gaming company, benefits from its position as the second largest player in an industry with high barriers to entry, according to Standard & Poor's Ratings Services (see "Ladbrokes PLC," published June 26, 2013). The company benefits from strong brand recognition within its major markets of the U.K. and Ireland, however, the company's business operations are limited to these two markets. As a result of its heavy dependence on the U.K., the company is exposed to the cyclically challenging, and currently adverse, discretionary consumer spending conditions in the region. Analysts polled by S&P Capital IQ expect the company's 2013 net income to decrease slightly compared with 2012, owing to lower than expected consumer discretionary spending in the U.K. (see chart 7). The company's earnings have grown at a slower pace than that of the indexed consumer discretionary sector's since 2009.

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 7

The operating incometo-revenue ratio reversed its slight downward trend in 2012, although it remains above Ladbrokes' peers' (see chart 8). Revenues saw a similar trend in 2012; however, we expect a slight decline going forward due to consumer spending trends and Ladbrokes' smaller share of the internet gambling market compared with its peers'.

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 8

Ladbrokes' cash from operations has remained fairly stable in each year of our observed period. Standard & Poor's expects cash from operations to remain at similar levels for 2013. The company's credit quality is supported by almost 390 million of availability under its revolving credit facility. The company's total debt has been decreasing since 2009. The leverage ratio has subsequently improved each year, supported by fairly stable EBITDA. The leverage ratio in 2012 was 1.44x, compared with 2.1x at year end 2011. The company's leverage ratio is better than its peers'. The company's capital expenditures have remained fairly low and steady, although we expect they could rise slightly in 2013 as Ladbrokes completes its acquisition of BETDAQ (see chart 11). Free cash flow generation has remained high and we expect this to continue. The company's free cash flow to total debt ratio is comfortably higher than its peers'. Ladbrokes' interest coverage has remained fairly stable, even when EBIT had been declining. We expect the interest coverage ratio to increase as the company lowers its total debt (see chart 12). The firm's interest coverage is slightly higher than its peers'.

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 9

10

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 10

11

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 11

12

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 12

Despite being higher than its peers', the company's return on capital has been decreasing somewhat over our observed period. This decrease is, in our view, partly a consequence of the company's significant exposure to the challenging economic conditions in the U.K. and Ireland (see chart 13).

13

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Ladbrokes PLC

Risk-to-Price Commentary from Global Markets Intelligence

Chart 13

Ladbrokes' credit metrics are better than its peer group's (see table 2).
Table 2

Metrics Comparison
Ladbrokes Average peer group

Revenue (Mil. $) Operating income/revenue (%) Free operating cash flow/total debt (%) Debt/EBITDA leverage (x) EBIT/interest expense Return on capital (%) Total debt/capital (%)
Last 12 months of available data. Source: S&P Capital IQ.

1,654 20.98 52.17 1.44 8.99 17.6 49.03

6,102 15.73 18.92 3.62 7.21 9.54 65.07

14

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Risk-to-Price Commentary from Global Markets Intelligence

Table 3

Bond Description
Security CUSIP/ISIN Currency Amt. outstdg (Mil.) Country Rating S&P Liquidity Index Sector Subsector Industry Yield (%) Duration (years) Seniority Issue date Maturity date Coupon dates Coupon rate Coupon type Coupon freq. Increment
Call

Ladbrokes Group Finance PLC 7.625% 05/03/2017 0/XS0491875562 GBP 225 U.K. BB, outlook stable , no CreditWatch Not available Consumer discretionary Consumer services Hotels, restaurants, and leisure 3.9 3.2 Senior unsecured 3/5/2010 3/5/2017 March 5, September 5 7.625 Fixed Semi-annual 1,000 No

Next Price
Make whole

No

End date Spread

Put

No

Next Price
Poison put

No

Expiration Price Senior MM four-year CDS as of 26/07/2013 Covenants

CDS--Credit default swap. Source: S&P Capital IQ.

202 basis points

15

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