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Howard Stutz

Caesars works to upgrade balance sheet, but analysts unimpressed

20 August 2014

LAS VEGAS -- A leading gaming executive was asked on background a few months ago if he understood Caesars Entertainment Corporation’s financial maneuverings to restructure the casino company’s $24.2 billion in long-term debt.

He just smiled.

“Gary seems to understand what he’s doing.”

For now, Caesars Entertainment Chairman Gary Loveman is an island unto himself.

Earlier this month, in a lawsuit filed by Caesars seeking to block institutional investors from interfering with the restructuring efforts, Loveman said the company has undertaken more than 50 capital market transactions to improve the company’s balance sheet and financial condition.

Another move happened last week.

Caesars struck a deal with several investment groups to trim $548 million in debt off Caesars Entertainment Operating Co., the most heavily indebted of Caesars three business units. The move would also slice interest expenses by $34 million annually.

“We are steadfast in our commitment to work constructively with creditors to deleverage (Caesars) and create value,” Loveman said.

But is anyone in the investment community listening?

Moody’s Investors Service termed the most recent effort as “credit negative.” An analyst for Fitch Ratings told Bloomberg News “default is a real possibility” for Caesars. Last week, following release of Caesars’ second-quarter earnings, in which the company doubled its net loss to $466 million, Macquarie Securities gaming analyst Chad Beynon titled a report to investors, “The shell game picks up speed.”

Beynon is just one of several analysts unsure of how to define the company.

“From an equity perspective, in our view it is becoming almost impossible to assign an intrinsic valuation to Caesars without knowing what’s going on behind the curtain within all three individual entities, particularly on the debt side,” Beynon said.

Daniel Jones, the manager of Avaring Capital Advisors LLC, writing for the financial website, said bankruptcy might be the company’s only solution following second-quarter earnings.

“At the moment, Mr. Market isn’t terribly enthusiastic about Caesars, and for good reason,” Jones wrote. “The company’s revenue did manage to rise, albeit not as much as market participants hoped for, but its bottom line was far worse than anticipated.”

In an interview nearly a year ago, Loveman was adamant Caesars would stay out of Bankruptcy Court to handle the debt. The figure was attached following the company’s $30.7 billion leveraged buyout by two private equity firms in 2008.

The financial moves Caesars made in just the past 12 months include moving company-owned casinos, properties managed in joint operating agreements, and the interactive gaming division into three operating units.

Caesars announced an overall restructuring plan in May that eliminated more than $1 billion in debt, raised another $1.75 billion in new debt, but with better interest terms and due dates.

In June, Caesars closed a poor-performing casino in Tunica, Miss. The company’s Showboat Atlantic City is scheduled to close Aug. 31, which would leave Caesars with three resorts in the market. The company could be looking to sell or close some of its 50 gaming properties in 13 states.

Wells Fargo Securities gaming analyst Dennis Farrell Jr. said the closing of Showboat and two other Atlantic City casinos next month could boost results from the company’s Harrah’s Resort Atlantic City in the Marina District.

However, Farrell advised high-yield bond investors to invest in Caesars Entertainment Resort Properties, a division that controls The Linq and other Strip casinos.

The improvements in Las Vegas numbers and volume reported by Caesars and other operators show that the Strip “should outperform regional gaming trends in 2014, while generating positive discretionary free cash flow,” Farrell said.

Caesars’ debt is the highest in the gaming industry. It’s larger than the $18 billion in debt carried by Detroit when the municipality filed for bankruptcy last year.

Caesars’ debt dominates conversations despite successes.

The Linq, a retail, dining and entertainment district on the Strip next to the Flamingo Las Vegas, opened in March. The centerpiece High Roller observation wheel has attracted more than 500,000 riders since its opening.

The company’s $442 million The Horseshoe Casino Baltimore, which it owns in partnership with Rock Gaming, LLC, opens in less than a week. But the $24.2 billion is a lot to overcome.

“The Caesars story remains relatively the same in our eyes, with fundamentals continuing to be soft in most of its markets and the significant debt load lingering as an overhang on the company,” Beynon said.
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