Any way out for Caesars?

Woodfield Consulting Group has put a “strong sell” recommendation on Caesars Entertainment stock, deeming it “a poor equity investment choice that offers low expected return to equity investors with high speculative risk.” Noting that Caesars has six years’ and $17 billion in balloon payments to look forward to, it also pointed out that debt service is devouring Caesars’ income: “The company produces an impressive cash flow from operations of nearly $1.8 billion annually, but this is quickly spent on interest averaging around 10%.”

A recent buyback of $2 billion “likely” wiped out Caesars’ cash reserves, Woodfield opines. In the group’s view, Caesars mortgaged the future to pay for the present by offloading growth opportunity Caesars Interactive to Caesars Acquisition Co. However, Caesars went private with debt that had a 4% interest rate and is now paying 2.5X that much: “Fortunately for CZR debt holders, the company has a profitable operating business generating nice margins. This provides enough cash to service interest on the debt. However, the forthcoming principal payments are unmanageable.”

What’s more, Caesars is generating cash flow of $1.7 billion but paying $2 billion in interest. This necessitates either improved operational results or — for those who prefer short-term fixes — asset sales, which degrade EBITDA over the long haul. Small wonder that CEO Gary Loveman is trying to open new markets (like Baltimore) and doubling down in others (such as Cleveland) ASAP, not to mention banquing on Linq and its many attractions — which are coming along quite nicely, thanq you.

“But the real 800 pound gorilla is the debt principal payments,” according to Woodfield, which breaks them down accordingly:

Year/Interest Principal

2016/$1.9B/$1.6B

2017/$3.5B/$2.6B

2018/$3.5B/$6.5B

In other words … “From 2015 thru 2018, Caesars must earn or raise $11.5 billion in principal + $8 billion in interest for $19.5 billion total, on EBITDA of present assets of approximately $8 billion. The remaining $11.5 billion must come from growth in earnings, selling assets, or kicking the debt can down the road. But as can be clearly be seen, the company has ample funds to service its debt at 10% (a nice return) in perpetuity, as long as principal never has to be repaid.”

For Caesars to stave off Chapter 11, cash flow would have to significantly increase (at a time when the company is underperforming). Also, the casino industry — and Caesars in particular — would have to outperform the gross domestic product (not likely). Potential buyers of Caesars’ assets, especially in Atlantic City, would know that Loveman is dealing from a position of weakness and could demand fire-sale prices … certainly nothing above the standard industry multiple of 7X cash flow. New debt, another rescue measure, would come at double-digit rates.

Concludes Woodfield, “the equity holders will be left with nothing over time … If the company cannot refinance, there will be forced liquidations of assets, possibly through bankruptcy, and eroding any possible growth in the future. The [private equity] firms, TPG and Apollo, realize this, and have started to divest growth assets …”

Other than that, of course, everything is just fine. Nothing to see here, folks, keep moving.

Casino gambling just took a little, tiny step forward in Japan yesterday.