Fantasy Sports Gamble Leaves Banks on Hook for Unsold Loans

(Bloomberg) -- Wall Street gambled — and lost — on a $1.64 billion loan for a lottery company backed by a Czech billionaire to fund a majority stake in a fantasy sports operator in Atlanta.

The loan to Allwyn fell prey to more discriminating credit markets, and after raising just $1 billion from institutional investors, banks including Goldman Sachs Group Inc. and Deutsche Bank AG had to step in to make up the shortfall — and ended up sharing $500 million of the debt on their own balance sheets, according to people familiar with the matter.

The deal’s struggle — which seemed unlikely in a heady corner of the credit market until a few weeks ago — showcases skittishness in leveraged debt markets. Finding investors has generally posed few problems this year, allowing banks to make the most of a revival in acquisitions. 

Banks were so confident they’d be overwhelmed with demand for the loans, used to fund the stake in PrizePicks, that they extended backstop-like financing on a fully underwritten basis, the people said, requesting anonymity to discuss private arrangements. But the fact that the Swiss issuer was a relatively unknown quantity for some investors, and excluded by ESG limits on gaming by others, forced banks to pick up the slack in demand, they added.

Backstop

Allwyn operates the lottery for the state of Illinois and the UK. It’s now seeking to expand its US presence and agreed to buy a 62.3% stake in PrizePicks for an expected initial cash consideration of $1.6 billion, implying an upfront enterprise value of $2.5 billion, according to a statement in September. 

The company is controlled by Karel Komárek, whose net worth of $10.6 billion makes him the 310th-richest person in the world, according to the Bloomberg Billionaires Index. Allwyn, which he controls through his Prague-based conglomerate KKCG, accounts for the vast majority of his fortune.

Banks typically commit to underwritten debt financings in advance of acquisitions, to give buyers certainty of funds, and such arrangements come with high fees and protections. 

Allwyn, however, secured financing through a lower-fee backstop loan that banks agreed to extend on a fully underwritten basis because they expected to syndicate it out to investors — and cut their exposure — in a matter of weeks, the people said. The group, which includes Barclays Plc and BNP Paribas SA, lost the advantages they’d normally get in a leveraged buyout loan, they added.

In particular, they lost some of their control over flexible pricing to account for market movements, what’s known as “flex” — a standard feature of LBO financing, the people said.

Win for Allwyn

Without flex, banks may need to eat into their own fees in order to sweeten the terms of a deal. 

It’s not clear whether Allwyn’s banks had to sacrifice their fees when they adjusted the pricing on the double-B rated term loan B to pay 250 basis points over the benchmark at a discount of 98, from initial guidance of 225-250 basis points at 99. 

Allwyn’s lenders also stepped in to provide $500 million through a term loan A, typically held by banks rather than sold on to investors. For the remaining $140 million, Allwyn drew on an existing revolving credit facility.

Representatives for Allwyn, Goldman, Deutsche, BNP Paribas and Barclays declined to comment. Some of Allwyn’s regular lenders including Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley, didn’t take part in the financing. Officials at all three banks also declined to comment.

Some recent gaming companies have had success raising loans. Among them: Flutter Entertainment, a popular borrower, recently raised a $500 million term loan B together with $1.3 billion of bonds, while Intralot SA arranged loans from Greek banks, institutional investors and private credit funds to buy Bally’s Corp.’s online casino business in July. 

--With assistance from Julius Domoney.

(Updates with Komárek’s net worth in sixth paragraph)

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