The Federal Reserve’s recent interest rate cut coupled with Caesars Entertainment’s (NASDAQ: CZR) ongoing debt reduction efforts are among the reasons the casino operator’s longer-dated bonds could be appealing to income investors.
In a new report to clients, GimmeCredit analyst Kim Noland noted Caesars could benefit from lower interest rates than some rivals because it has a higher portion of its debt in variable rate bonds than fixed rate equivalents. By some estimates, the Harrah’s operator would save $91.1 million in annual interest expenses if rates fall by 150 basis points, which some market observers believe could happen by the second quarter of 2025.
Caesars’ debt reduction targets also suggest the company may address the significant amount of secured debt in the capital structure. Thus, we initiate coverage with a recommendation on the secured first lien debt, that we view as a better option than the unsecured debt in a weakening economy,” observed Noland.
She initiated coverage of Caesars 2032 bonds, which sport a yield-to-worst of 5.6%, with an “outperform” rating. Bonds with longer durations are more responsive to changes in interest rates.
Caesars Applauded for Asset Sales
Following the 2020 merger with Eldorado Resorts that created “new Caesars,” the gaming company was faced with a mountain of debt. Since then, the management team led by CEO Tom Reeg has made some progress on reducing that burden. Noland lauded those efforts.
“Asset pruning like the recent sale of World Series of Poker brand should also assist debt and leverage reduction,” she wrote.
In September, the casino operator announced the sale of the intellectual property rights associated with the World Series of Poker (WSOP) to investment firm NSUS Group Inc. for $500 million. Caesars gets an initial payment of $250 million with the remainder due in five years while retaining rights to use the WSOP brand for land-based poker tournaments.
Regarding further asset sales, another analyst recently floated the idea of Caesars selling the Linq Promenade on the Las Vegas Strip, which could result in a $700 million transaction. The company hasn’t commented on that.
Keep an Eye on Ichan, Advises Gimme Credit
In her report, Noland mentioned that Carl Icahn’s Icahn Enterprises (NASDAQ: IEP) is again involved with the Horseshoe operator’s shares. His company told investors in August it restarted a Caesars stake to the tune of 2.44 million shares.
“Bondholders should remain vigilant for the potential of activist activity,” advised the Gimme Credit analyst.
Previously, Icahn was the architect of Eldorado/”old Caesars” marriage. He recently said he’s not eyeing activist action with the gaming company. It’s also unlikely management is interested large-scale acquisitions and doesn’t need Icahn’s prodding to sell assets to pare debt.
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