The Federal Reserve’s recent interest rate cut, combined with Caesars Entertainment’s ongoing debt reduction efforts, are stirring interest among income investors for the casino operator’s long-term bonds.
In a recent report to clients, GimmeCredit analyst Kim Noland highlighted Caesars’ potential to benefit more than some of its competitors from lower interest rates due to a significant portion of its debt being in variable rate bonds rather than fixed rate equivalents. Estimates indicate that if interest rates decline by 150 basis points, Caesars could save approximately $91.1 million annually in interest expenses. Some market observers believe this rate cut could materialize by the second quarter of 2025.
Caesars’ debt reduction targets also indicate the company may address the substantial amount of secured debt in its capital structure. Consequently, Noland recommended the secured first lien debt, viewing it as a more favorable option than unsecured debt in a weakening economy. She has initiated coverage of Caesars’ 2032 bonds, which offer a yield-to-worst of 5.6%, giving them an “outperform” rating. Bonds with longer durations tend to be more responsive to changes in interest rates.
Following the 2020 merger with Eldorado Resorts, creating the “new Caesars,” the company found itself burdened with significant debt. However, under the leadership of CEO Tom Reeg, the management team has made strides in reducing this financial load, a move praised by Noland.
For instance, the recent sale of the World Series of Poker (WSOP) brand to investment firm NSUS Group Inc. for $500 million aligns with Caesar’s asset pruning strategy. The transaction includes an initial payment of $250 million with the remaining balance due in five years, allowing Caesars to retain the rights for land-based poker tournaments.
Speculation about further asset sales is also in the air. Another analyst recently suggested that Caesars could potentially sell the Linq Promenade on the Las Vegas Strip, which might yield about $700 million. However, Caesars has not commented on this possibility.
Noland also noted Carl Icahn’s Icahn Enterprises’ renewed involvement with the casino operator’s shares. In August, Icahn’s company announced it had reestablished a stake of 2.44 million shares in Caesars. GimmeCredit’s analyst advised bondholders to remain vigilant for potential activist activity. Icahn, who previously orchestrated the Eldorado/“old Caesars” merger, has stated he’s not eyeing activist actions with the company currently. Additionally, management is not inclined towards large-scale acquisitions and does not need Icahn’s prompting to sell assets for debt reduction.
