Rumors Persist of a Debt Restructuring for Caesars Entertainment, Which Might Helps Share Prices
Caesars Entertainment shares plunged 7.2% in after-hours trading on Monday after Q3 numbers were released. Despite a year of soft trading for Caesars during a time when the S&P 500 is at an all-time high, investors are cashing out again. The financial experts are once again predicting dire consequences for Caesars, which is thought to have about $23 billion in debt. The interest payments on such a large debt takes away a large chunk of the day-to-day revenues.
Zacks Consensus Estimate had expected a loss of $1.68 when the financial reports for the third quarter were released. Instead, the adjusted loss was $2.35. Such financial news is bound to lead to some panic among shareholders, so the sell-off was furious, once it started.
Caesars Makes Money, But Not Enough
Steve Cortez, founder of Veracruz LLC, says Caesars Entertainment makes money on a day-to-day basis, but is dealing with a crippling debt situation which drains all the profits that might otherwise accrue. Cortez blames the debt load on too much financial engineering by the former executives of the company, including private equity players and hedge funds getting involved in the company’s fortunes.
He pointed to continuing over-investment, when the company should be retrenching. Just this summer, the company opened the biggest Ferris Wheel (“The High Roller”), so it continues to spend extravagantly.
Rival Companies Hit by Chinese Crisis
That isn’t to say that the other major players in the American casino gambling industry aren’t having their troubles. In fact, the financial analyst said that Caesars is, in many ways, “a poster child for what happens when too much financial interplay happens”. Cortez told ABC News he might favor Caesars Entertainment over its rivals like Wynn Resorts and Las Vegas Sands, were it not for the debt situation.
Caesars never bought-in to the Macau gambling industry. While that investment paid off huge dividends for the rival companies the last few years, the massive slow-down in Macau’s gambling industry due to official crackdowns on corruption is causing a dramatic shift in perceptions.
Caesars Debt Burden
Of course, investors don’t have the luxury of ignoring the company’s debt problems. Caesars Entertainment‘s major problems began in 2008, when the company taken private by the equity firms, Apollo Global Management and TPG Capital. Those firms used a leveraged buyout of around $30 billion.
Such a buyout might have made sense in other financial circumstances, but since it happened in January 2008, it was a bad time to be taking on such a debt burden. When the financial collapse happened 8 months later, Caesars Entertainment (formerly Harrah’s Entertainment) found itself in a terrible debt crisis.
That led to an interest expenses increase of 26% year over year to $708.3 million in Q3. Such increases led to an Adjusted EBITDA that was $442.5 million. That is down 12.9% from 2013 Q3. The Adjusted EDITDA is a result of roughly $23 million in bad debt expense, approximately $39 million of unfavorable hold, and approximately $52 million driven by lower marginal returns on marketing investment and lower volumes. Such a financial picture is certain to lead to sale-offs in the range of 5% to 10%.
Not everything was bad news. The addition of The Cromwell, The LINQ, and The Horseshoe Baltimore added about $20 million in EBITDA. Gary Loveman can point to such successes, despite a concerning picture overall.
Crisis Is Getting Worse
Still, more than 6 years later, the crisis has not abated. If anything, Caesars’s problems are getting worse. The company’s executives took it public once more with an initial public offering in 2012. That IPO has been a financial disaster for most investors, as Caesars Entertainment’s debt continues to devour revenues. The company has several times sold off or closed properties in recent months, which has only fueled speculation that it is headed towards bankruptcy. Gary Loveman insists that isn’t going to happen, but CEOs always insist such things until bankruptcy is declared.
Zacks has given Caesars Entertainment a rank of #4, which means investors should “Sell”. Though the industry at the moment is having its troubles, Zacks ranks several stocks in the same industry as shares investors should “Buy”. These Rank #2 stocks incliude Penn National Gaming Inc., Speedway Motorsports Inc., and Monarch Casino & Resort Inc.
