Will Caesars Entertainment's REIT Plan Offset Debt Issue?

Share price of Caesars Entertainment Corporation CZR was up 5.4% on Nov 20 after the company presented a plan to its creditors to restructure the obligations of its indebted unit, Caesars Entertainment Operating Co. (CEOC).

Per the plan, CEOC would be converted into a real estate investment trust (REIT) which will be divided into two companies. One of the companies will own the casinos and hotels while the other one will rent and manage them.

Since the plan was proposed in October, two creditors have walked away from the discussions. This U.S.-based gaming company stated in a filing that it continues to make proposals to the remaining creditors. The company has also offered creditors with a debt-restructuring plan to cut borrowings at CEOC to provide senior secured credit holders and first-lien bondholders 100% and 93.8% of what they owe, respectively.

Why the Decision?

Caesars has not been able to post profits for a very long time. The repeated losses reflect the company's heavy debt load. Caesars currently has $22.8 billion in long-term debt. Caesars Entertainment (formerly known as Harrah's Entertainment) was made private in 2008 by equity firms Apollo Global Management and TPG Capital in a leveraged buyout of around $30 billion. However, it launched an initial public offering in 2012 and began trading again.

Moreover, the global financial slowdown had a severe impact on the U.S gambling and casino industry. This accompanied with the highly leveraged nature of the buyout kept the gaming company under pressure. Moreover, the company is heavily spending on renovation of its properties to boost traffic, which is also hurting the profits of the company.

Consistent Efforts to Pay Off Debt

The company has been striving to pay off its debt through the sale of assets and deals with creditors. The company has been trying to shape up its finances in recent years by spinning off divisions and dividing its casinos, trademarks and businesses. The company has also designed a comprehensive plan to aid independent stock listing and significant de-leveraging of its subsidiary, CEOC.

Given the scenario, the company with 68,000 employees worldwide has reportedly decided to lay off about 680 workers to cut down on costs.

How Will the Shift to a REIT Help?

A real estate investment trust is a corporate structure that is permitted to pay at least 90% of its taxable income in the form of dividends to shareholders, which lowers income tax liability. Therefore, we believe Caesars Entertainment is trying to capitalize on a seemingly more favorable tax environment through this move.

Some other companies that are treading the same path include Penn National Gaming Inc. PENN and Pinnacle Entertainment Inc. PNK.

What Else?

A few days back, Caesars also stated in a filing that Caesars Entertainment Operating Co. currently has sufficient liquidity to survive. However, it also stated that the unit would not have enough cash to repay its debts by the fourth quarter of 2015 if it does not undergo a refinancing, amendment, private restructuring, or a re-organization under Chapter 11.

Given the high level of debt, the proposal would not completely save Caesars from bankruptcy as per media reports. However, we believe the REIT plan would offer a tax benefit. We need to wait and see whether the move will boost the value of Caesars' assets and solve its troubles.

Caesars presently has a Zacks Rank #4 (Sell). Monarch Casino & Resort Inc. MCRI is a better-ranked stock in the same sector with a Zacks Rank #2 (Buy).

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