Eldorado Could Need Leveraged Loan Market to Thaw to Get Caesars Deal Done

Posted on: May 2, 2020, 05:00h. 

Last updated on: May 3, 2020, 11:40h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Eldorado Resorts (NASDAQ:ERI) is aiming to have its $17.3 billion takeover of rival Caesars Entertainment (NASDAQ:CZR) wrapped sometime in June. But it could need the leveraged loan market to thaw to get the acquisition across the finish line.

Eldorado May Need Leveraged Loan
Eldorado could use a thaw in the leveraged loan market to get its Caesars deal done. (Image: Bloomberg)

Leveraged loans are extended to companies with large debt burdens or poor credit ratings, and as such, lenders view the obligations as carrying higher default risk. The coronavirus outbreak spooked the high-yield bond market, sparking concern regarding the financial strength of indebted gaming companies. In turn, the leveraged loan market froze.

By early February, the market showed signs of balancing out. But then it spiraled downward through March and into quarter-end, as the economic consequences of the pandemic sent repeated shock waves through financial markets,” said S&P Global Ratings in a report obtained by Casino.org.

The leveraged loan market is essential to getting the Eldorado/Caesars deal finalized, because JPMorgan, Credit Suisse, and Macquarie are sitting on a $3 billion commitment to the gaming companies that those banks would like to syndicate to move off their books. The problem is the loan market is at a standstill.

Ides of March

Leveraged loan issuance started 2020 on a tear, with $64.7 billion of new supply coming to market in January, the second-highest monthly mark on record. The scenario reverse in March, as COVID-19 pounded US equity markets, sending investors fleeing from gaming equities, while spreads on corporate debt widened.

“The window for new issues slammed shut, and March–in stark contrast to January–closed with no new institutional loan volume, which hasn’t happened since December 2008,” said S&P.

The March drying of the loan market stoked speculation during that month that ERI could encounter difficulty in bring the Caesars purchase home, prompting a spate of short selling in shares of both stocks. The third month of 2020 was the second-worst on record for performance of leveraged loans, surpassed only by October 2008.

As appetite in the leveraged loan market diminished, gaming companies sought other avenues for raising capital, including drawing down on credit revolvers. Since March 5, 100 US companies drew on credit facilities, with 52 coming from the consumer discretionary group – the sector in which casino operators reside.

‘Bulky Commitment’

Experts believe it will take some time for the leveraged loan market to return to vibrancy. But that time could be measured in weeks. That would jibe with rumors indicating ERI will be able to seal the deal with Caesars sometime in June.

Still, there’s work to be done to stoke appetite for riskier loans.

“Participants indicate the market will need several weeks of stability before attempts to open the primary market will be realized, particularly with large M&A deals,” according to S&P Global. “And there are still some bulky commitments on the shadow calendar, such as LogMeIn and Caesars/Eldorado.”