Fitch Assigns Junk Rating to DraftKings, Citing Ongoing Risks

Fitch Ratings has given DraftKings a BB+ Long-Term Issuer Default Rating (IDR) putting the company just below investment grade. The credit rating agency also gave a BBB- rating with an RR1 recovery rating to the gaming company’s senior secured debt, while its senior unsecured convertible notes got a BB+/RR4 rating. However, Fitch‘s overall outlook for DraftKings stays stable.

Fitch Ratings Flags Risks, But DraftKings Continues to Dominate Online Gaming

Even though DraftKings got a junk-grade rating, it still holds a strong spot in the online gaming world. The company has a big chunk of the market in online sports betting and iGaming running in 26 US states and Ontario, Canada. The rating shows DraftKings’ solid growth in money coming in, but it also points out the challenges that come with the cutthroat online gaming and sports betting scene.

Fitch pointed out that the company’s careful money management and better cash flow margins were good signs. DraftKings is expected to have cash flow margins go up to over 20% by 2026 backed by very little debt and a well-run business model. The company’s skill in using customer deposits and past tax losses helps make its finances more flexible.

DraftKings’ finances remain pretty solid, with its upcoming senior secured term loan likely to have little effect on its overall debt. Fitch predicts the company’s EBITDA leverage will fall to about 1x by 2026, as revenue keeps growing and margins keep improving. What is more, strong cash flow should allow the company to pay off its senior unsecured convertible notes in 2027.

DraftKings expects to see its revenue grow by 36% in 2025, with high single-digit jumps in the years after. This growth will come from better customer involvement more money from each user, and a move to betting options with higher profits, like parlays. The company’s recent purchase of Jackpocket should help them get and keep more users through cross-marketing.

Regulatory and Market Challenges Test DraftKings’ Online Betting Dominance

DraftKings holds a top spot in the market, but its dependence on online sports betting makes it vulnerable to shifts in betting patterns. Online sports betting earnings can swing due to unexpected game results, unlike the more steady iGaming. The company’s tie to big sports events, like the Super Bowl, can cause big changes in its revenue and EBITDA.

Also, DraftKings operates in a field with tough promotional competition. Its marketing costs should drop from 33% of revenue in 2023 to the mid-teens in the coming years. Still, ads and promos play a key role in keeping customers engaged.

Changes in regulations create another hurdle for DraftKings. Illinois hiked taxes on online sports betting revenue in 2024 pushing rates up to 40%. This new policy highlights the constant financial and regulatory risks that might affect the company’s financial situation. As more states across the US make online betting legal, it opens up chances to grow. However, higher taxes and tougher rules could eat into profits.

Despite these hurdles, DraftKings stands ready to keep growing. Its plan to expand its iGaming arm, boost productivity, and use its strong market position could lead to more financial wins. Fitch said an upgrade might happen if the company handles its online sports betting risk well, pushes EBITDA above $1 billion, and keeps leverage under 2.5x.On the flip side, a downgrade could occur if EBITDA margins drop below 15% or if rivals force higher promotional spending hitting profits.