On Monday, Caesars Entertainment Corp (NASDAQ:CZR) announced a deal with bondholders to reduce its debt by $548 million. CZR shares traded sharply lower following the news. As part of the deal, CZR will cancel $393 million of the debt that it owns in its operating company, Caesars Entertainment Operating Co. (CEOC). Additionally, CZR and CEOC will each pay out $77.7 million in cash to bondholders.
Caesars' Shares Down 30% From My Previous Piece
As shown by the chart below, since June 9, 2014, the date of publication for my piece entitled Caesars Entertainment: A Strong Sell, shares are down 30%. The reason why I had been, and continue to be, bearish on CZR is the company's massive debt load.
Why I Remain Bearish
While the deal that CZR announced is a step in the right direction, it is a relatively insignificant step as the company still has more than $20 billion of debt outstanding. CZR CEO Gary Loveman said, "the transaction we are announcing today is the latest in a series of steps intended to deleverage the operating unit and position it for a potential stock listing." I believe the next, inevitable step in the CZR story is a significant debt for equity swap which will be highly dilutive to current CZR shareholders. However, given the significant drop in CZR's share price, I am not as bearish as I had previously been. Furthermore, the announced deal suggests that CZR might be able to reach a larger deal in the weeks and months ahead. Currently, CZR remains locked in a court room battle with additional bondholders. The time to go short CZR has likely passed due to changing risk/reward dynamics. However, I continue to believe that the ongoing restructuring will result in a lower price for CZR shares.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.