Caesars is planning a comeback. After Caesars Entertainment Operating Company (CEOC) emerges from bankruptcy sometime in the third quarter, Caesars will still have $14.6B in debt on its balance sheet. With a market cap of $1.64B, that still puts its total leverage at nearly 900%. This will be manageable until 2020 when $3.71 billion in principle and interest is due to Caesars Entertainment Resort Properties (CERP) and Caesars Growth Partners (CGP). Caesars will not have $3.71 billion available in 2020, so they will have to roll over that debt.
The problem is, by 2020, interest rates will be much higher and the terms they will get on rolling over that debt will not be pretty. Even if manageable, the rates they will likely get will suck out any free cash flow, and they’ll have to hobble along or declare bankruptcy again.
Until 2020 Caesars can grow, but the higher rates go until then, the more obvious the monolithic 2020 debt wall will become. It’s just a question of when markets will figure this out again. Even now, Caesars is paying between 7% and 11% on its fixed rate debt to CERP, quite high even as variable rates are low. The high interest is partly a concession to creditors who have already lost so much on the bankruptcy restructuring. Imagine what they’ll have to pay in service costs even if debt is successfully rolled over past 2020.
There are two ways Caesars can prepare for this. Neither of them are particularly attractive options. First, they can try to be extremely frugal and save up $3.71 billion over the next 30 months or so, somehow, but that would mean forgoing growth opportunities and seeing static or shrinking revenues. Caesars is not taking this path. They are hoping that they will be able to rollover debt past 2020 at reasonable terms, while in the meantime they are pinching pennies (with some decent results) and planning expansion, mainly in Las Vegas.
Focusing on revenue growth and efficiencies, free cash flow is not going to be saved for a rainy day, but used to service current debt and expand. Japan, Brazil, and Canada expansions are planned, along with real estate development on the Las Vegas Strip. Come 2020, if this all succeeds and the economy is still moving along (neither of these suppositions are assured) Caesars may have to sell off some of this new stuff to get passed the 2020 debt wall.
The bottom line is that from now until 2020, Caesars is a growth play. Beyond that, by late 2018 or 2019, it’s a short. Aggressive traders can play the stock both ways, or more conservatively and a smarter move is to just wait for late 2018 and if shares are at or near their highs, short it with long term options into late 2020.
The growth strategy that Caesars has over the next two years may end up working and it may not, so buying Caesars here is a risk. But what is more certain is that financial trouble will be reappearing around 2019 or so and shares will head back down.
The company is trying to show the good side of things now and rebrand itself, and indeed the last two years have been good to Caesars, as bankruptcies go. Last Vegas room rates have exploded higher to $140 from $92, and revenue per dollar of marketing spend is at its best in the company’s history. There’s nothing like a good bankruptcy to scare a company into efficiency. More guests are using self-serve kiosks for check-in, easing labor costs.
This is all well and good, but has to be seen in the context of a healthy economy over the last two years. What if that changes? Caesars is still not equipped to deal with a downturn, just as they were not prepared in 2008.
Recent Caesars presentations point to minutiae that tries to keep investors hyperfocused on even the smallest bright spots while ignoring the debt elephant in the room. Points like the potential for $20M in extra revenue by charging for parking, record banquet revenue in March, and record beverage revenue in March. Parking, food, and drinks are nice, but they’re not going to help you pay off billions in debt within two years. The most presentation underscores some sort of “proprietary employee sales training initiative” that is supposedly responsible for an increase in high roller revenues, but really, how amazing can a sales training course be? Perhaps it has helped somewhat, but surely some (most?) of the improvement is simply due to a very tight labor market and generally decent economic conditions that are encouraging more players to gamble more money. A proprietary training program won’t help in a downturn much.