Caesars, Penn Still Contending with Elevated Debt Levels, Says Analyst

• Casino operators’ debt/EBITDA levels elevated relative to peers.
• Analyst says coverage ratios are somewhat low.
• He adds high debt can hinder asset-level investment.

Shares of Caesars Entertainment (NASDAQ: CZR) and Penn Entertainment (NASDAQ: PENN) flailed this year with the casino operators’ sizable debt burdens looming large.

That despite three interest rate cuts by the Federal Reserve and moves by both companies to pare outstanding liabilities. In a Dec. 23 note, Morningstar analyst Dan Wasiolek points out Caesars’ and Penn’s debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratios are 6.7x and 8.7x, respectively. Those balance sheet issues could affect the companies’ ability to tap debt markets, if needed.

Balance sheet health matters in the capital-intensive and highly competitive gaming industry, as it influences the cost and ability of firms to secure debt, which is often used to update or acquire physical and online assets needed to attract visitors and boost positioning in the marketplace,” observes Wasiolek.

In fairness to Penn, the regional casino operator was able to access $850 million to pay for enhancements at regional casinos in Illinois and Ohio as well as the M Resort Spa Casino in Henderson, Nevada and those improvements have been lauded by sell-side analysts.

Caesars, Penn Waiting on Help from Lower Interest Rates

As it relates to Caesars, potential benefits by way of lower interests rates have been widely discussed with some analysts estimate that for every 100 basis points the Fed’s lending rate declines, the Harrah’s operator could save $60 million in annual interest expenses.

“Rates on much of Caesars’ and Penn’s fixed-rate debt approximate a high-single-digit percentage versus the low-single-digit percentage that is more common for less levered industry peers,” adds Wasiolek.

As noted above the central bank cut rates three times this years and multiple reductions are expected in 2026. That could boost sentiment among middle-income consumers — a demographic vital to both the Caesars and Penn investment stories. Additionally, lower borrowing costs could spur more mergers and acquisitions activity, which could benefit Caesars if it looks to unload some assets.

Caesars, Penn Debt Burdens Could Hamper Investments

Wasiolek notes both operators’ debt levels could restrain their ability to invest in their businesses, though in fairness to Penn, the regional casino giant is sprucing up several of its brick-and-mortar venues while investing in its fast-growing iGaming unit.

For Caesars, the ability to improve some its land-based casino hotels, both on and off the Las Vegas Strip, is critical because according to some reviews on internet travel sites, several of the operator’s properties need to be enhanced. That could be a tough lift for the Flamingo operator over the near-term.

“We have lowered our fair value estimates for no-moat Caesars and Penn to $35 and $16 per share, respectively, from $52 and $20,” concludes Wasiolek. “We’ve also raised our Uncertainty Rating for Caesars to Very High from High on leverage concerns. We maintain Penn’s Very High Uncertainty Rating.”