Is Caesars Bound for Bankruptcy?

Financial analyst says WSOP spinoff could be in the cards

by , Sep 7, 2012 | 10:00 am

Fitch Ratings Service said Wednesday it downgraded its view on Caesars Entertainment Corp. from stable to negative, hinting that the casino operator could look at Chapter 11 bankruptcy protection as a method to restructure its sizable debt.

Another option could include spinning off the Caesars Interactive Division as a separate public company. Caesars Interactive oversees the World Series of Poker.

“The outlook revision reflects Fitch’s heightened concern regarding (Caesars) near-to-medium term cash burn rate and potential covenant compliance pressure,” Fitch analyst Michael Paladino wrote in a report to investors. “These factors, combined with previously expressed concerns about weakening relative asset quality due to constrained capital reinvestment, more than offset the positive credit impact from recent transactions executed to push out its debt maturities meaningfully.”

Paladino said there was “an increasing possibility” that Caesars, which operates 10 Strip casinos and more than 50 casinos nationally, “could look to execute transactions that Fitch views as a default.”

The report from the bond rating service surfaced early Wednesday and may have been responsible for another decline in Caesars’ shares. The company closed at a 52-week low of $6.48 on the Nasdaq Global Select, down 20 cents, or 2.99 percent.

Caesars went public Feb. 4 at $9 a share. The stock shot up 71 percent that day, to $15.39.

Caesars has almost $20 billion in long-term debt, the highest in the casino industry. Fitch told investors the casino operator may need to obtain a covenant amendment or waiver by late 2013 or early 2014.

“Besides entering into Chapter 11, Caesars may elect to execute debt exchanges, possibly for equity since the company is now public,” Paladino said.

However, Paladino said debt exchanges are less likely now than in 2009 when the company reduced debt by $3.8 billion by exchanging a bulk of its unsecured notes with subsidiary guarantees into second-lien notes with lower amounts.

Caesars spokesman Gary Thompson declined comment on the Fitch report, saying the company doesn’t talk about “forward looking” reports. Thompson noted that Fitch affirmed Caesars’ existing ratings for the company’s various units, even though the overall outlook was changed to negative.

Caesars Entertainment, which owns Caesars Palace, Bally’s Las Vegas, Planet Hollywood and the Rio, is expanding both on the Strip and nationally. In the second quarter, Caesars lost $241.7 million.

The company is spending $500 million to build Project Linq, a nongaming retail, dining and entertainment development between the Flamingo and Imperial Palace properties.

Outside of Las Vegas, the company opened a $350 million casino in Cleveland, is building a $400 million casino in Cincinnati, is planning a $300 million casino in Baltimore and is bidding to build a $1 billion casino in Boston.

Caesars has an equity partner for projects outside of Nevada.

Fitch has reduced its forecast for Caesars cash flow, pretax earnings, beyond 2015.

“The company’s higher cost refinancing activities have also contributed to the weakened near-term (cash flow) profile,” Paladino said.

The ratings service said Caesars is receiving income from its ownership in Caesars Interactive, which operates the World Series of Poker, online gaming operations in the United Kingdom and social gaming website Playtika.

“Fitch believes that most of Caesars’ current equity value is attributable to this unit, which would benefit materially if online gaming is legalized on the federal level in the U.S.,” Paladino said.

A spinoff of Caesars Interactive or other effort to monetize the online business could be “logical precursors to a restructuring,” Paladino said.

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871. Follow @howardstutz on Twitter.
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