When gambling, the top two principles are to know when to hold ‘em and know when to fold ‘em … at least if you follow Kenny Roger’s advice. The same holds true for gambling stocks — and shareholders should pay close attention to the flashing red “fold” sign on Caesars Entertainment Corp (CZR) stock now.
CZR stock got a small bounce last week on news that 60% of its first-lien noteholders had signed off on an $18.4 billion debt-restructuring deal.
The plan called for placing Caesars Entertainment Operating Company into bankruptcy on Jan. 20 and converting it into a real estate investment trust (REIT).
The agreement was viewed by many as a positive development for CZR — and a lifeline that would pare back Caesars debt to a more manageable $8.6 billion. CZR’s junior creditors, however, decided to pursue a different path: Moving to force Caesars Entertainment into involuntary bankruptcy.
Appaloosa Investment LP, along with hedge funds linked to Oaktree Capital and Tennenbaum Capital on Monday made its move to block CZR’s bankruptcy plan. The group requested that an examiner be appointed to investigate claims that insiders “plundered” the operating unit, according to a Bloomberg report. CZR fell nearly 4% on Monday.
Things Get Worse for CZR
A further complication: An International Swaps and Derivatives Assn. (ISDA) panel was unable to determine whether Caesars entered technical default in December. As a result, ISDA is convening an external panel to determine whether expired credit default swaps tied to CZR’s debt should be added to existing CDS contracts that will be triggered once Caesar’s files for bankruptcy.
CZR stock has been an ice-cold hand for a while now. Back in 2008, TPG Capital and Apollo Global Management took Caesars private for a whopping $30 billion — then the Great Recession hit and casinos discovered their business was not nearly as recession-proof as everyone thought. Although gaming stocks have made a comeback in recent years, CZR was so saddled with debt that it couldn’t buy its way out of a bluff with its 2012 IPO.
CZR is benefiting from resurgence in Las Vegas, and a commitment by Caesars’ Chairman and CEO Gary Loveman to slash costs has been one of the few positives for CZR in recent months. But the meltdown in Atlantic City has hurt CZR greatly, and earnings have been even worse than expected.
In the most recent quarter, CZR reported a $908.1 million loss on $2.2 billion in revenue. Instead of the $1.47 a share loss analysts expected, CZR lost $6.29 per share. To make matters worse, Caesars Palace suffered from more than $39 million of unfavorable hold in the third quarter — CZR’s unfavorable hold could turn out to have been more than $85 million in the second half of 2014.
Caesars Entertainment has been under siege lately and CZR’s prospects are starting to look as grim. The stock is already down nearly 15% year to date, earnings have continued to stumble, and creditors have grown increasingly restless. Now is a good time to fold CZR stock.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.