Eldorado Resorts Swoons Amid Coronavirus, Financing Fears, but Stock Still has Defenders
Posted on: March 9, 2020, 10:13h.
Last updated on: March 9, 2020, 11:36h.
Entering Monday, Eldorado Resorts, Inc. (NASDAQ:ERI) was off 43.58 percent this year, a tumble that erased $2.2 billion in market value. Things are getting worse for the regional gaming company, with the shares down 11.44 percent at this writing as investors fret about the impact of the coronavirus on the Las Vegas Strip, and the ability of the company to procure necessary financing for its $17.3 billion takeover of Caesars Entertainment Corp. (NASDAQ:CZR).
Trading around $29.50 midday Monday, Eldorado stock could close below $30 for the first time in roughly two years, extending a slump that has seen the name become one of the most profitable in the gaming industry for short sellers.
Weighing on ERI shares is chatter that Credit Suisse, JPMorgan Chase, and Macquarie Group, which previously agreed to loan the gaming company $7 billion to purchase Caesars, are having difficulty finding buyers for that commercial paper. That comes amid COVID-19 fears and concerns that Eldorado is taking on too much in the way of liabilities. Possible outcomes include the banks holding the debt themselves or selling it at discounts.
At least one analyst is addressing investors’ concerns and comes away remaining bullish on ERI.
ERI has obtained fully committed financing for its acquisition of CZR,” said Roth Capital analyst David Bain in a note provided to Casino.org. “ERI’s CY21 $10 free cash flow (FCF) target contemplates a blended rate of ~6% on $6.8b of bond financing. While ERI will “pick its spot” to go to market over the next 45+ days and the final rate could come inside 6%, committed financing is likely backstopped at 7%.”
As part of the deal announced last June, ERI will pay $8.5 billion in cash and equity for the Caesars Palace operator while assuming $8.8 billion in debt. Those liabilities are more than triple ERI’s current market capitalization of $2.7 billion.
Corporate bonds issued by Caesars coming due in 2025, which will remain on the market after the ERI deal closes in the second quarter, sported a yield of 6.8 percent last Friday, up from five percent when the takeover offer was announced, according to Bloomberg data. Yields rise as prices fall, but Bain argues market participants may be overreacting to the specter of debt covenants being triggered.
The analyst says expected cost savings and Caesars earnings before interest, taxes, depreciation, and amortization (EBITDA) would need to decline by approximately 21 percent for covenant events to be triggered, and even if that occurred, ERI has about $3.15 billion of “capital flow flexibility” to stem any problems.
“Post the CZR transaction/financing, ERI should have ~$500mm in excess cash, $2b in undrawn capability, average over ~$100mm of FCF per month with no debt maturities until December 2024,” said the analyst.
ERI has other cards it can play to raise capital if needed, including the expansion or spin-off of the Caesars sports betting business and the likely sale of one or two Las Vegas Strip properties following consummation of the deal.
Sin City Concerns
Along with other travel and leisure names, gaming stocks have recently been pounded on fears that the COVID-19 outbreak in the US will keep gamblers home and away from casinos. Over the past couple of weeks, the White House, large companies, and trade groups have scrapped meetings in Las Vegas, announcements that have fanned the flames of selling pressure in the equity market.
“While indicators demonstrate some lost convention and leisure business, overall 1Q20 trends to-date for ERI/CZR have been solid, according to check,” said Bain. “We do not refute additional, perhaps significant LV virus-led disruption, though we note ERI/CZR hedges potential degradation with the utilization of its peer-high 65mm patron Total Rewards loyalty club, which combines with air traveler/Las Vegas substitutions to ERI regional facilities.”
The Roth Capital analyst has a “buy” rating and a 12-month price target of $75 on ERI, or more than double where the shares trade at this writing.