Caesars Entertainment Corp. (NASDAQ: CZR) is causing worry about its financial solvency. Featuring a capital structure loaded with debt, some insiders have been speculating that one of the industry’s largest operators – it owns more than 50 casinos, hotels, and golf courses around the world – could be on the brink of Chapter 11 bankruptcy.
“In an abundance of caution, this newsletter advises you not to deposit any funds (deposits for hotel reservations, deposits in the cashier’s cage, or not redeeming casino chips, etc.) . . . until the situation at Caesars becomes clearer,” says Bill Mandel, who regularly publishes the newsletter “Openings and Closings in Las Vegas”, claiming more than 64,000 subscribers.
However, UNLV gaming expert David Schwartz offers a different view and says that a casino bankruptcy would probably not endanger cash deposits by players. “I’m struggling to remember any time when a gaming company’s bankruptcy filing directly affected customers. It would be a problem for shareholders, but not customers.”
Still, if the company does file for bankruptcy protection from its creditors, hundreds of players are likely to withdraw their deposits from Caesars in the hopes of saving their cash. A “run on the bank” could further reduce gaming activity at any of Caesars’ iconic casino properties throughout the United States.
The private equity-backed company is saddled with more than $23 billion in debt with just under $2.1 billion in cash as of Q2 2013. Some traders are speculating that CZR is a stock that should be shorted, thus anticipating downward movement in its price. In 2012, the company reported $8.58 billion in revenue and took $1.49 billion in net losses.
Aside from its immense debt load, the company is facing large maturities in 2015 and 2016 that are expected to eat up a lot of cash on an already fragile balance sheet. Caesars’ debt load does not leave it with much room for flexibility.
The company is majority-owned by private equity firms Apollo Global Management LLC and TPG Capital. Both firms hold a combined 69.9 percent of the company, which they acquired in a $30.7 billion buyout in 2008 that included $12.4 billion in debt.
In a July 29 earnings call, Caesars CEO Gary Loveman said that he is “acting aggressively to improve the company's capital structure.”
Hoarding enough cash through casino operations could be a daunting challenge given the weak U.S. economy. That has resulted in Las Vegas now having the highest unemployment rate in the country, with new growth in gambling occurring in Macau, near Hong Kong. Casinos there bring in nearly three times more revenue than similar establishments in Sin City.
Since the 2008 recession, the U.S. gaming market has pretty much been lackluster. High levels of growth are expected to continue to occur in emerging markets, but not in North America.
Part of the Caesars Entertainment Corp's current restructuring effort includes spinning off a new entity, Caesars Growth Partners, which will include some prime properties and online assets. The company recently received an infusion of $1.2 billion from existing shareholders, including $500 million from its majority owners Apollo and TPG Capital.
However, none of the above actions are expected to help Caesars take off a meaningful chunk of its debt off the balance sheet. Thus, the company seems to be positioning itself to only pay its debt if creditors agree to significantly discount its debt amounts. That could signal a future Chapter 11 filing by Caesars.