Moody’s warns again on Caesars Entertainment’s debt

Caesars Entertainment properties in Las Vegas are Paris, shown in the background, as well as Bally’s, Bill’s, Flamingo, O’Sheas, Imperial Palace, Caesars Palace, Rio, Harrah’s and Planet Hollywood.

Moody’s Investors Service is reiterating concerns that because of its hefty interest expenses, Caesars Entertainment Corp. isn’t spending enough to maintain its hotels and casinos.

Moody’s said Caesars, with long-term debt of $18.6 billion and debt/annual EBITDA leverage at more than 11 times, has interest expenses of nearly $1.7 billion annually. That consumes about 90 percent of its property EBITDA – earnings before interest, taxes, depreciation and amortization, Moody’s said.

This doesn’t leave enough cash to spend on keeping existing properties competitive, Moody’s said in a report issued Tuesday.

"Caesars’ significant debt service burden leaves the company with insufficient free cash flow for maintenance of existing assets. We believe this makes Caesars’ properties prone to market share loss over the intermediate term," Moody’s analysts said in the report.

This is the same warning Moody’s issued last July about the company, then known as Harrah’s Entertainment Inc.

On Tuesday, Moody’s noted Caesars is spending heavily in Las Vegas, having recently borrowed $450 million for Project Linq and finishing the Octavius Tower at Caesars Palace.

"This project has a decent return profile, but it will not resolve Caesars’ over-leveraged balance sheet," Moody’s said.

Moody’s added: "Clearly, management seems more interested in jump-starting growth initiatives than in reducing debt, anticipating that a rebound in same-store sales is around the corner. This is a risky bet considering the slowing economy and dim outlook for a strong economic rebound."

In the long run, unless management changes course, Moody’s expects an eventual debt restructuring or some sort of strategic move like selling assets or going public.

Moody’s on March 1 acknowledged improvements in Caesars’ finances when it upgraded key Caesars debt ratings.

But on Tuesday it issued the special comment on Caesars’ debt challenges; as well as a separate report saying Caesars and MGM Resorts International are among the gaming resort operators most vulnerable to continued U.S. economic weakness.

On May 10, Caesars, the nation’s largest casino operator, reported first quarter results showing business was finally picking up on the Las Vegas Strip after two years of struggles tied to the U.S. recession.

Net revenue in Las Vegas during the first quarter for Caesars was $726 million, up 6.4 percent from the same quarter in 2010.

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