Overview -- We are raising our issue-level rating and revising our recovery rating on Global Cash Access' (GCA) first-lien senior secured debt, given material debt repayment in the past year and our expectation for lower debt outstanding in our projected, hypothetical default year. -- In addition, we are affirming our 'BB-' corporate credit rating on the company. -- The stable outlook reflects GCA's solid financial metrics, clear market leadership position, high contract renewal rate, and a stabilizing operating environment. Rating Action On Feb. 29, 2011, Standard & Poor's Rating Services raised its issue-level rating on Global Cash Access Inc.'s (GCA) $245 million senior secured first-lien credit facility to 'BB' (one notch higher than the corporate credit rating) from 'BB-'. The facility consists of a $35 million revolving credit facility and a $210 million term loan. We also revised our recovery ratings on this debt to '2' from '3'. The '2' recovery rating indicates our expectation for substantial (70%-90%) recovery in the event of a payment default. At the same time, we affirmed our 'BB-' corporate credit rating on the company. The outlook is stable. Rationale The ratings on GCA reflect its high customer concentration, niche product focus, and lack of international diversification, along with recent pricing pressures and a still-sluggish gaming environment. However, GCA's financial profile provides a cushion within its existing rating to absorb the persistent weak operational developments. Furthermore, the company has a clear market leadership position in its niche, a solid base of recurring revenues stemming from long-term contracts, and a high contract renewal rate. GCA is the gaming industry's leading provider of transaction-processing services and technology products that dispense cash to customers on the casino floor. The company's ATMs and cash access services distribute cash and cash advances through ATM, debit, and credit card transactions; and its software platforms, gaming patron database, and workstations for casino cashiers help casinos manage credit risk and marketing efforts. The company's ATM and cash access services account for about 90% of revenues. We view GCA's business risk profile as "weak" (as defined in our criteria). Revenue for the last 12 months ended Sept. 30, 2011 was $544.1 million, down approximately 2.7% sequentially and 11.7% year over year. The entire revenue decline is attributable to the loss of the Caesar's contract, which was terminated in November 2010 and represented about 14% of revenues. Pro forma for the loss of Caesar's, revenue was up about 4.4% and 0.4% year over year for the three and nine months ended Sept. 30, 2011, respectively. Furthermore, in November 2011, the company acquired competitor MCA Processing LLC, which brought with it half of the former Caesar's contract. Growth in the quarter ended Sept. 30, 2011 represented the first period of growth experienced since 2008 and high-margin credit card cash access transactions still haven't grown in about four years. Nonetheless, we believe that the company's modestly positive organic growth will continue in 2012 due to an expected improvement in the U.S. gaming market outlook. The company has been successful in renewing every top 20 contract since the initial Caesar's loss (~90% historical renewal rate), and has won a number of contracts for new casino openings (~75% historical new win rate). Typical contract length is between three and five years, and despite the fact that the company still has a high degree of customer concentration (the top five contracts account for ~30% of revenue), over half of the top 20 have agreements beyond 2013. This stable base of contracts should leave the company poised for secular gaming upswings and any return in growth of consumer credit. Therefore, for 2012, we expect low-single-digit organic growth and high-single-digit growth inclusive of the MCA acquisition. We believe that gaming activity shifting to international markets (under 5% of the company's revenues are from overseas), and legalization and development of online gaming markets are both longer term opportunities and risks to growth. Along with the weak top-line performance the past couple of years, GCA has seen EBITDA margin decline from the 18%-20% range pre-2008 recession to around 11%-12% currently. Even though the company's cost of revenues are highly correlated with revenue levels, a shift in product mix to more ATM transactions instead of higher margin credit card cash advances and competitive pricing pressure on new and renewed contracts impaired profitability. The company has done a good job of controlling operating costs, and we believe that the EBITDA margin has bottomed. Furthermore, the company should see material EBITDA margin improvement with the October 2011 enactment of the Durbin Amendment, which caps the amount of interchange expense on signature and PIN debit transactions, and it is uncertain what portion of the cost benefit will be returned to customers over the next several years. GCA has a "significant" financial risk profile (as defined in our criteria). Standard & Poor's adjusted debt to EBITDA was 3.2x for the last 12 months ended Sept. 30, 2011. Free operating cash flow (FOCF) to debt is strong for the rating, at around 26%, but on a relatively modest cash flow base. The company has historically used free cash flow to repay debt, and has repaid about $30 million of its term loan through September 2011. We expect that the company will continue to make additional debt repayments over the near term. We believe that leverage could decline to below 3x over the next few quarters. However, in the intermediate term, we believe that GCA could return to making share repurchases or acquisitions. Liquidity We believe that GCA has "adequate" liquidity (as defined in our criteria). The company's cash sources should exceed cash uses by a wide margin over the next two years. However, absolute cash flow levels are somewhat modest, and we believe that the company's high degree of customer concentration leaves it potentially less able to withstand a low-probability, high-impact event. The company's cash sources include about $60 million of cash on hand at Sept. 30, 2011, good free cash flow generation, and full availability under its $35 million revolver. Normal cash uses include about $8 million of annual expected capital expenditures, and variable working capital needs. We expect GCA to continue to prudently manage the risks and costs of its cash funding and settlement arrangements with third-party financial-, networking-, and processing-services providers. The company is required to adhere to two financial maintenance covenants: a total leverage ratio and an interest expense coverage ratio. The covenant headroom under the leverage ratio has been over 35% since the refinancing, and we believe that the company will maintain adequate headroom even as the ratio steps down from 4.25x for the Dec. 31, 2011 test period to 3.25x for the Jan. 31, 2012 test period, where it will remain until 2015. Recovery analysis For the complete recovery analysis see the recovery report on GCA, to be published in due course following the release of this article on RatingsDirect. Outlook The outlook is stable, reflecting GCA's solid financial metrics, clear market leadership position, successful resigning of the majority of contracts up for renewal, and a slowly improving operating environment. We could upgrade the company to 'BB' if it can reduce and sustain leverage in the low-2x area by continuing to repay debt or through more favorable growth dynamics, providing greater clarity on its financial policy, and continuing to successfully renew and win contracts without significant pricing pressure. A downgrade is unlikely over the near term, absent a large, unforeseen debt-financed acquisition or share repurchase, which causes leverage to rise and stay above 4x. Related Criteria And Research -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012 -- Industry Economic Outlook: Slow Global IT Spending Growth Is Likely To Continue Into 2012, Jan. 12, 2012 -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, Dec. 22, 2011 -- Reshuffling The Debt: Global High-Tech M&A Activity Accelerates, Oct. 13, 2011 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Global Cash Access Inc. Corporate Credit Rating BB-/Stable/-- Upgraded; Recovery Rating Revised To From Global Cash Access Inc. Senior Secured BB BB- Recovery Rating 2 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.