Caesars’ 15% Shows Loveman’s Difficult World: Corporate Finance
Caesars Entertainment Corp. (CZR) bonds with an average yield of almost 15 percent are indicating the largest U.S. casino owner will have to restructure its $19.9 billion of borrowings by 2016.
While other U.S.-based gaming-company debt yields an average 9.18 percent, according to Bank of America Merrill Lynch index data, Las Vegas-based Caesar’s bonds with maturities of more than three years have spreads to peers that show investors are concerned it won’t be able to service its longer-term borrowings.
Caesars has reported five straight quarters of net losses as gaming demand shrinks in Las Vegas and Atlantic City. The firm, taken private by affiliates of Leon Black’s Apollo Global Management LLC and David Bonderman’s TPG Capital for $30.7 billion in 2008, has more than $9 billion of debt due by 2016.
“Given their leverage and interest coverage, we can’t rule out the possibility it will at some point do a debt exchange or need to restructure,” Peggy Holloway, senior credit officer at Moody’s Investors Service said in a telephone interview.
The company will burn through $461 million of cash this year and $566 million next year, bringing total estimated liquidity to $1.55 billion on Dec. 31 and $980.6 million at the end of 2013, analysts led by Susan Berliner at JPMorgan Chase & Co. wrote in an Aug. 6 report.
“We retired more than $5 billion of debt and pushed out maturities until 2015” since the leveraged buyout, Gary Thompson, a spokesman for Caesars said in a telephone interview.
“We continuously monitor our capital structure and will address those 2015 maturities well before they come due.”
Investors are demanding a 21.03 percent yield on Caesars’ $470.5 million of 10.75 percent bonds due February 2016, compared with an 8.18 percent yield on notes maturing that month from Boyd Gaming Corp, according to data compiled by Bloomberg. The company’s $125.2 million of 5.375 percent securities due December 2013 yield 7.55 percent, compared with a 6.58 percent yield on Boyd’s April 2014 debt.
Moody’s rates Caesars Caa1, a level reserved for borrowers in “poor standing” and subject to “very high credit risk.” Standard & Poor’s grades its unsecured bonds CCC, one level below the Moody’s ranking, while giving the overall company a rating of B-, one step higher. Boyd is rated B2 by Moody’s and B at S&P.
Caesars has been losing money since the credit crisis and a glut of rooms led to the biggest Las Vegas gambling slump on record. Second-quarter revenue declined almost 1 percent at Caesars resorts in Las Vegas and 8.6 percent in Atlantic City, the company said in an Aug. 6 statement.
The company reported a net loss of $241.7 million or $1.93 a share, for the quarter, compared with a loss of $155.5 million, or $1.24, a year earlier.
“The world since April or May has gotten more difficult,” Gary Loveman, Caesars’ chairman and chief executive officer, said on an Aug. 6 conference call to discuss second-quarter results with analysts and investors. “There’s trepidation on the part of consumers to spend at the rate they have historically.”
Declines in consumer confidence and slow payroll expansion have dampened discretionary spending for items such as gaming, Moody’s analysts led by Holloway wrote in a June 26 report.
“Current earnings barely cover the company’s interest expense,” Holloway said. “What distinguishes Caesars from its peers is that it doesn’t have exposure in Asia, which is a faster-growing market, and its absolute debt burden is higher,” she said.
Caesars bonds lost 1.9 percent in July, the most among U.S. casino companies other than Indian gaming issuers, according to Bank of America Merrill Lynch index data. Eight of the 10 highest-yielding bonds in the company’s High-Yield Gaming index are Caesars.
Yields on Caesars bonds due in February 2016 are 14.8 percentage points more than those on MGM Resorts International’s $237.9 million of 6.875 percent bonds due April 2016, which traded at 6.26 percent on July 13, according to Trace. Caesars’ December 2013 notes trade at a 5.8 percentage point spread to the 1.75 percent yield on MGM’s November 2013 securities.
Caesars’ closest maturity is its $5 billion commercial mortgage backed securities in 2013. The company has the option to extend the maturities twice, for one year each, in exchange for 50 basis-point fees, Eric Hession, senior vice president of finance and treasurer, said on the company’s earnings call.
“The issue is that this LBO is already four years old and is not doing that well for the sponsors,” Chris Snow, an analyst at CreditSights Inc. in New York, said in a telephone interview. “The rest of the industry is better capitalized than these guys. If trends continue to go against them, it could become obvious that they can’t compete in their existing markets.”
The company, formerly known as Harrah’s Entertainment, was founded as a Reno, Nevada, bingo parlor in 1937. It grew by acquisition after 1995, culminating in the $9.3 billion purchase of Caesars Entertainment Inc. in June 2005. Apollo and TPG then bought Harrah’s, receiving as much as $22.3 billion in financing to fund the biggest private-equity buyout of a casino operator.
Harrah’s changed its name to Caesars after it raised $16.3 million in February selling 1.81 million shares at $9 each, the company said in a statement at the time. The stock fell 11 cents a share to $8.04 at 10:54 a.m. in New York, after reaching an all-time low of $7.98.
“The IPO didn’t bring a material amount of cash into the company,” Snow said. “What it did was create liquidity for initial investors and give optionality to get a debt-for-equity swap, but otherwise it’s pretty neutral to the story.”
A debt-for-equity swap is a possibility “in the event equity markets for casino stocks improve,” Loveman told investors on the call. A share price of “$8 and change is not a compelling price to receive for issued equity.”
Caesars is trying to reduce its debt burden by growing its earnings and is partnering with local investors to develop new properties as well as sell some assets to increase liquidity., Kim Noland, an analyst at debt research firm Gimme Credit LLC wrote in a June 20 report. The casino company announced the sale of Harrah’s St. Louis to Penn National Gaming Inc. in May for $610 million.
“There are headwinds from the consumer, increased competition mostly in Atlantic City, and they have a pretty sizable debt load with upcoming maturities in 2015,” JPMorgan’s Berliner said in a telephone interview. Those borrowings will have to be refinanced or extended, she said.
“We want some deleveraging from the debt side, so I think debt-for-equity makes sense,” Berliner said. “The question is how much could they get done, and how many people would be willing to do it.”
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