Eldorado Resorts’ $17.3 billion acquisition of Caesars Entertainment is expected to close as planned this spring, but it’s not going to be pretty for banks that committed to billions in loans to fund the merger.
With financial markets reeling from the coronavirus pandemic and investors fleeing the gaming, travel and leisure sectors en masse, the banks face what Bloomberg News called an “uphill battle” to offload the debt.
JPMorgan Chase, Credit Suisse Group and the Macquarie Group agreed to the financing last June. Now it’s a tough sell on a tight deadline to persuade bond and loan buyers on the future of a highly leveraged gaming company, at the same time that the Las Vegas Strip, where Caesars operates eight resorts, could see slowdowns in consumer spending, personal travel and conventions.
“The best comparison might be 9/11, when people were scared to fly,” said Gene Neavin, a senior investment analyst and portfolio manager at Federated Hermes. “Now people may be scared not only to travel, but also to be in a casino with thousands of people.”
The banks may have little choice but to offer the debt, about $2.4 billion of loans to Caesars and $4.8 billion of bonds and loans for Eldorado, at a steep discount, Bloomberg reports. They could even be forced to swallow it, along with the blow to their balance sheets, by coming up with the cash themselves.
The merger will transform Eldorado from a mid-sized regional operator to the largest gaming company in the world by number of properties. But the cost to Eldorado of acquiring a company basically three times its size, not to mention one still burdened post-bankruptcy with some $8.4 billion of debt, has been a concern in some quarters even before the coronavirus outbreak.
To help justify the transaction, Eldorado is banking on about $500 million of cost savings from the combined entity, a number some analysts view as optimistic. When all is said and done, the takeover will boost the company’s debt relative to a key measure of earnings to over seven times, according to credit-rating firms, possibly leading to a downgrade. Not surprisingly, perhaps, Eldorado’s shares have lost more than 75 percent of their value in the last 30 days or so.
Bond yields, however, have yet to succumb to the volatility that’s gripped the equities markets, and experts cited by Bloomberg still believe the banks should be able to find a clearing level for the debt. They say investors will find a comfort level in the inherent value of both companies’ assets and their strong ability to generate cash.
“We feel very good about the execution that we’ll get in the credit markets,” Eldorado CEO Tom Reeg said on the company’s February 26 earnings call. “This deal is closing. It’s closing soon.”
