Outlook for Caesars Entertainment debt is mixed, ratings agency says

By Steve Green

Tuesday, Dec. 7, 2010 | 11:50 a.m.

Fitch Ratings today assigned initial debt ratings to gaming giant Caesars Entertainment Corp., saying the Las Vegas company remains highly leveraged but has a stable outlook thanks to its valuable customer database and diverse portfolio of casinos.

Fitch's overall issuer default rating for Caesars came in at CCC, a speculative or junk rating. Issuer default ratings consider the possibility of companies defaulting on debt obligations.

Caesars' CCC rating was no surprise given the company's $23 billion in debt and its high leverage ratio -- or debt/annual EBITDA ratio -- of 12.6.

EBITDA is a profitability measure meaning earnings before interest, taxes, depreciation and amortization. As EBITDA increases and debt declines, the leverage ratio is reduced. EBITDA at Caesars is running at an annual rate of about $1.84 billion, Fitch said.

In the case of Caesars, ratings agencies regularly warn about its high debt levels. But with deep-pocketed owners the investment houses Apollo Global Management LLC and TPG Capital LLC (Texas Pacific Group), the company has continued to grow in the United States during the recession.

On the plus side, Fitch noted Caesars' "solid liquidity position" as well as its "industry-leading U.S. business profile and a solid track record of acquiring and disposing of gaming assets."

On the negative side, Fitch noted "deteriorating asset quality" and a "poor near-term market exposure profile."

Fitch has said Caesars as well as its main Las Vegas Strip competitor, MGM Resorts International, have under-invested in their properties because of other financial obligations.

This will pressure Caesars as it competes in Las Vegas against Wynn Resorts Ltd. and Las Vegas Sands Corp. and in regional competition against Penn National Gaming and Ameristar Casinos, Fitch said.

As for Caesars' big markets of Las Vegas and Atlantic City, Fitch said they both have a weak near-term outlook.

"Fitch expects a Las Vegas Strip recovery to build traction in 2011, accelerate as the year progresses, and be more pronounced in 2012-2013, as the impending Cosmopolitan opening will be the last new casino opening on the Las Vegas Strip for at least five years, in Fitch's view," today's report said. "However, Atlantic City will remain under pressure for some time, as table games have been introduced in the Pennsylvania market, which is impacting near-term performance, while the potential for additional supply (in New York and Atlantic City) provides a substantial overhang to the market in the medium term."

Fitch noted Caesars is the largest and most diverse U.S. casino operator and that it depends heavily on slot machine revenue, which is less volatile than results from table games.

"The company's Total Rewards customer database has over 40 million members, which the company uses effectively to build loyalty and cross-market its properties," Fitch said.

While Caesars lacks a casino in fast-growing Macau and elsewhere in Asia, it's poised to profit from Internet gambling in the United States should it be approved on the federal level thanks to Caesars' existing interactive division and its World Series of Poker brand, Fitch said.