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\tBy HOWARD STUTZ
\n\tLAS VEGAS REVIEW-JOURNAL<\/p>\n
\tFor Gary Loveman, bankruptcy is not an option.<\/p>\n
\tLoveman, chairman of Caesars Entertainment Corp., admits the casino operator has \u201ca very complicated capital structure\u201d in carrying the gaming industry\u2019s largest long-term debt figure.<\/p>\n
\tHowever, the company has undertaken several refinancing steps that increased its cash on hand to $2 billion, extended debt maturity dates and opened a corporate growth vehicle that allows Caesars to participate in gaming expansion over the next few years.<\/p>\n
\tDuring an interview at his Caesars Palace corporate office this past week, Loveman said a bankruptcy reorganization is not in the cards for the company, which operates more than 50 casinos in 13 states including 10 properties on or near the Strip.<\/p>\n
\t\u201cThe conditions the company faces today are better and not worse than they have been before,\u201d Loveman said. \u201cWe don\u2019t have any significant debt maturities until 2018. We\u2019re much better structured. There is nothing that would trigger a liquidity crisis. We don\u2019t have anything like that.\u201d<\/p>\n
\tLoveman, 53, bristles at analyst reports that the company, which operates some of the gaming industry\u2019s best-recognized brands \u2014 Caesars, Horseshoe, Harrah\u2019s and the World Series of Poker \u2014 will have to file bankruptcy to tame its long-term debt of $23.7 billion. The debt has a net value of $21 billion.<\/p>\n
\tEarlier this year, Moody\u2019s Investor Service called that debt \u201cunsustainable.\u201d<\/p>\n
\tIn an Oct. 31 research note, Wells Fargo Securities gaming analyst Dennis Farrell Jr. told investors the firm remains \u201cuncomfortable with (Caesars) leverage and interest coverage profile.\u201d<\/p>\n
\tLoveman said there is \u201cno scenario that makes any sense to us\u201d that would put Caesars through a court-administered reorganization.<\/p>\n
\t\u201cThese same people have been predicting the bankruptcy of the company since 2009,\u201d Loveman said. \u201cSo far, they have been unsuccessful in having that prediction made accurate.\u201d<\/p>\n
\tCaesars\u2019 current debt-to-equity structure was no mistake. The debt, Loveman said, was put in place \u201cby design\u201d when private equity groups TPG Capital and Apollo Global Management in January 2008 took the company private through a $30.7 billion leveraged buyout.<\/p>\n
\tHe said the debt served a purpose. By placing a high amount of debt on top of a limited equity pool, it was expected cash flow from the business would increase the company\u2019s value, \u201cdisproportionately to the equity.\u201d<\/p>\n
\tUsing a pen to sketch bar charts on a notepad bearing the logo of the Washington, D.C.-based Business Roundtable, Loveman drew on his academic background as an associate professor at the Harvard University Graduate School of Business to explain Caesars\u2019 capital structure over a five-year period.<\/p>\n
\tThe company\u2019s debt is about $4 billion less than it was in 2008, but the equity value has also declined, primarily because of the recession.<\/p>\n
\t\u201cThe company has an enterprise value that is second only to Las Vegas Sands or MGM (Resorts International) depending upon the day,\u201d Loveman said, referring to fluctuating bond and stock markets. \u201cThe company is one of the most valuable casino companies in the world, but the split between debt and equity is disproportionately debt versus equity.\u201d<\/p>\n
\tdifferent perspectives<\/p>\n
\tRolling forward to 2013, Caesars has grown. The company bought Planet Hollywood Resort by acquiring the hotel-casino\u2019s debt at a discount; opened the 668-room Octavius Tower at Caesars Palace; built two casinos in Ohio in partnership with Rock Gaming; and is building a $400 million casino in Baltimore.<\/p>\n
\tOn the Strip, the company is completing the $550 million Linq project, which includes renovation of The Quad (formerly the Imperial Palace) and the centerpiece High Roller Observation Wheel. The $185 million transformation of Bill\u2019s Gamblin\u2019 Hall into a boutique luxury hotel is also underway.<\/p>\n
\tAlthough debt remains an issue to some in the investment community, it doesn\u2019t concern Loveman and company insiders.<\/p>\n
\tLast month, as part of a multipronged internal restructuring plan, the company replaced expiring debt with new debt that has maturity dates starting in 2020. The loans are backed by Linq and the Octavius Tower.<\/p>\n
\tRather than issuing \u201can enormous amount of new equity\u201d with proceeds going toward retiring the debt, the company secured better loans and backed them with unencumbered pieces of the company.<\/p>\n
\t\u201cIt is absolutely accurate to say this an awful lot of debt,\u201d Loveman said. \u201cIt is also accurate to say that this is the result of financial transactions and not a bad investment.<\/p>\n
\t\u201cThe balance between debt and equity is to some degree a deliberate strategy. Recognizing we could have done other things; we have chosen to pursue it in these terms, given our outlook for the company.\u201d<\/p>\n
\tSo why doesn\u2019t Wall Street see things Loveman\u2019s way?<\/p>\n
\tFarrell, although concerned about leverage, said the \u201celevated bond yields and extended maturity profile offset our fundamental concerns for the time being.\u201d<\/p>\n
\tDeutsche Bank gaming analyst Kelly Knybel told investors on Oct. 30 that Caesars had a \u201ccompelling\u201d story, but there are several risks to the investment, including debt levels and the deferred spending.<\/p>\n
\ta stock inviting caution<\/p>\n
\tIn February 2012, Caesars put 1.4 percent of the company on the market through an initial public offering. In October, Caesars released 10 million additional shares, raising $200 million.<\/p>\n
\tThe two stock sales reduced TPG and Apollo\u2019s ownership stake in Caesars to 64 percent.<\/p>\n
\t\u201cThe new equity was purchased like this,\u201d Loveman said, slapping his hands together for emphasis. \u201cThere are equity investors who find the idea of a levered equity an appealing play, but it is a risky play.\u201d<\/p>\n
\tHowever, Loveman said a large stock offering at today\u2019s prices to pay down the debt \u201cwas not in the best interest\u201d of TPG and Apollo.<\/p>\n
\tMany analysts, he said, are cautious with a stock like Caesars.<\/p>\n
\tStill, the company has attracted several high-profile investors, including hedge fund billionaire John Paulson, who controlled 12 million shares as of June 30, and Soros Fund Management, the investment arm of billionaire George Soros, a high-profile supporter of liberal and progressive political causes. The fund owns 6 million shares.<\/p>\n
\t\u201cIt is best held by sophisticated owners and not retail investors,\u201d Loveman said, adding that Paulson and Soros have not reduced their holdings since the company went public.<\/p>\n
\tThe other step in the company\u2019s new corporate structure was creation of Caesars Acquisition Co. to seize expansion opportunities.<\/p>\n
\tCaesars Entertainment owns 57 percent of the new company and holds an option to buy back the rest in three years. Caesars stockholders who chose to participate in a stock sale were able to purchase one share of the holding company for each share they owned in the parent company.<\/p>\n
\tThe move raised more than $1.17 billion and placed ownership of Planet Hollywood Resort, Caesars\u2019 interactive gaming division and the under-construction Baltimore casino into Caesars Acquisition.<\/p>\n
\tApollo and TPG put $500 million into the creation of Caesars Acquisition to \u201cattract like-minded investors,\u201d Loveman said.<\/p>\n
\tCaesars Acquisition provides a way for the parent company to jump into new markets \u2014 Caesars is already being linked to a casino project in upstate New York \u2014 and avoid adding to the debt.<\/p>\n
\tLoveman believes the corporate leadership has taken the correct financial steps for Caesars Entertainment.<\/p>\n
\t\u201cWe feel very confident in (the company\u2019s) future and we are managing it accordingly,\u201d Loveman said.<\/p>\n
\tContact reporter Howard Stutz at hstutz@reviewjournal.com<\/a> or 702-477-3871. Follow @howardstutz on Twitter.<\/p>\n