Caesars Entertainment's Credit Rating Downgraded by Standard & Poor's
Recently, Caesars Entertainment has been the topic of discussion due to its efforts to manage sky-high debts. They've engaged in shuffling around debt and selling properties to subsidiaries in a bid to safeguard their primary assets and secure their long-term future. However, not everyone is convinced that these measures are sufficient.
Standard & Poor's (S&P) slashed the corporate credit rating of Caesars Entertainment this week, labeling their long-term prospects as "negative". Credit analyst Melissa Long from S&P explained that the recent sale of four casinos to the Caesars Growth Partners (CGP) subsidiary won't eliminate the long-term debt worth $23 billion held by the parent company.
Debt that's Uncomfortably High
Long expressed her doubts regarding the company's ability to fulfill its $3.5 billion debt commitments that mature in 2015. This led to a drop in Caesars' corporate credit rating from CCC+ to CCC-, keeping it firmly entrenched within the junk grade category.
She stated, "The downgrade signifies our belief that Caesars' capital structure is unsustainable. The sheer amount of cash the company will consume in 2014 and 2015 suggests the likelihood of a restructuring in the near future."
Caesars' cash crisis has intensified in recent years. Based on Bloomberg data, the company consumed $730.5 million in cash last year, up from $497.5 million the previous year. According to S&P, the company is likely to dish out another $1.2 billion in cash this year to meet expenses. Since 2009, the company has been in the red every single year.
Unhappy Creditors
Just days ago, a consortium of Caesars bondholders and lenders fired off letters to the company, demanding the recent asset sales be reversed. The consortium felt that Caesars hadn't received enough compensation for the deals and also argued that they lacked the necessary transparency. Caesars responded byasserting that undoing these transactions could lead to a default from Caesars.
S&P concurred with this sentiment in its statement, mentioning that even if all the proceeds were utilized for debt reduction, it still wouldn't be enough to save the company.
"We anticipate that Caesars will consider a debt exchange offer in the near future," Long noted in her statement.
S&P has also adjusted their projection on the likelihood of Caesars first-lien debt holders receiving their dues. While previously, they estimated a 70-90% probability of recovery, they now see it as a toss-up, setting the chances at a bleak 50-70%.
Calm Investors
Contrary to expectations, investors remained collected after receiving the review. Shares of Caesars Entertainment Corporation gained $0.47, or 2.7%, to $17.78 on Tuesday, despite the gloomy outlook on Caesars. However, this could be more a reflection of a positive stock market trend rather than optimism for Caesars. The company's stocks have tumbled by 25% so far in 2014.
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