Facing the Wall of Debt: Are Gaming Companies Immune?

The document analyzes the potential impact of a looming corporate debt wall on gaming companies, questioning their immunity to broader economic pressures. It highlights that over $2 trillion in corporate debt is set to mature in the next two years, with Goldman Sachs estimating $230 billion for the remainder of 2023, $790 billion in 2024, and $1.07 trillion in 2025. An additional $4+ trillion is due between 2026 and 2030. The analysis, published in August 2023, focuses on the North American and South Korean gaming markets, examining specific company financials.

While many tech and gaming companies initially exhibited strong balance sheets and debt-servicing capabilities, with a January 2023 analysis of 114 companies showing 94 with positive EBITDA and only 22 with positive net debt, signs of strain are emerging. Rising interest rates and a deteriorating business environment pose challenges, particularly for companies with high net debt to EBITDA ratios. The scope for cost reduction is limited, necessitating a return to growth.

Specific case studies illustrate varied debt profiles. Netmarble's net debt to EBITDA ratio more than doubled in six months, from 9.28 to 26 times, alongside declining revenues and profits, and a tripling of interest expense from 2021 to 2022. Unity holds $1.23 billion in net debt, with $2.87 billion in total debt, largely comprising convertible notes. Its 2026 notes ($1.7 billion at 0% interest, conversion price $308.72) are unlikely to convert given the current stock price of $35.32, suggesting a need for refinancing. AppLovin, with $2.393 billion in net debt, has proactively reduced its net debt to EBITDA ratio from over 4 to 2.99 and utilized interest rate swaps to mitigate risk, despite a 51% increase in interest expenses. Take-Two Interactive has a more conventional debt profile of $2.22 billion net debt, primarily in longer-term fixed-rate bonds.

The document concludes that the era of "easy money" has ended, and companies heavily reliant on expansive growth strategies are under stress due to significant interest rate hikes. Those with unsustainable debt and ongoing losses are particularly vulnerable, especially if they fail to achieve profitable growth within 12 months of cost-cutting measures. The full effects of these rate hikes are expected to materialize over the next couple of years.