This weekend I introduced you idiots to vega hedging, and today I am here with further obscurity. Today, we dive into some company fundamentals. What is about to unfold is up there with pulling a 🌈🐻 Michael Burry, except it’s not against housing. It is against $PENN Gaming. These 💎🙌 have been short since $10, and I ain’t stopping now.
I initially did a write-up on $PENN back on Monday that 🌈automod🌈 did not let through, and since then they have been downgraded by Moody’s. The share price has continued to sky rocket, and it just reinforces my Big Short opinion.
I recognize the IQ of the collective here is negative, and you individuals are levered up the ass so much you don’t understand the difference between debt and equity, but I did this DD for myself, and thought I’d share.
Let us dive into the financials. As we do this, we are focusing in on risk of default. For the preschoolers in the room this is like when your wife’s boyfriend takes your credit card, buys your wife that new Louis Vuitton purse and doesn’t pay the bill. Kind of.
Some things to understand: Casinos carry more than your typical bank and bond debt, they also carry significant lease liabilities for the physical casino properties. A lease liability is similar to you (28M) paying your parents $250/month to live in the cellar because your Starbucks barista job pays you $7.69 an hour. Fucking Snowflake.
We’re going to briefly walk through the 3 key financial statements, focusing on the key criteria surrounding Penn’s leverage. All financials are for year end Dec 31, 2019.
Note: I omit some financial information because that would take too much time and go over people’s heads. I know you guys don’t know what cash is, but if you don’t understand operating income, interest expense, etc… I cannot help you. May God have mercy on your soul.
|Long-term Finance Obligations||4.1B|
|Long-term Lease Liabilities||4.4B|
|Long-term Finance Lease Liabilities||0.2B|
Note: Actual cash on balance sheet is $437.4M for 2019, but by my estimates the acquisition of Barstool Sports in January puts cash balance ~ $300M. Also, if you’re from Boston, fuck you. The only good thing to come out of your third rate city is The Departed.
Statement of Cash Flow (focus on financing activities):
|Cash Flow from Financing Activities|
|Principal Payment – Long-term Debt||(46.6M)|
|Principal Payment – Finance Obligations||(51.6M)|
|Principal Payment – Finance Lease||(6.2M)|
Now, let’s do a deep dive into Interest Expense because that is of primary focus.
The way stupid GAAP accounting works, many of the payments for servicing the lease obligations fall under interest expense. GAAP is like that MSFT 200c expiring 4/17 that you held with diamond hands that is sitting at -98%. It just sits there in your account, staring you down.
|Bond (5.625% coupon)||22.5M|
|Bank Debt (TLA, TLB, Rev)||~ 76.5M|
|Total Interest Expense||524.2M|
Note: Interest expense on bank debt (term loans, revolvers) is priced at a floating rate (LIBOR + Credit Spread) because they did not enter into any interest rate swaps to convert to a fixed rate. 2019 average interest expense was 3.65%, because of recent Fed Rate Cuts, this average interest expense I expect to be between 2.5%-2.75%. They have a LIBOR floor of 75bp.
What This Means:
This year, $PENN is going to be required to make a few essential payments.
- Bonds: Corporate bonds pay semi-annual interest payments (principal to be paid in 2027)
- Bank Debt (TLA, TLB, Rev): Bank loans have preset payment schedules that are principal + interest
- Lease Obligations: They need to pay for the buildings that their casinos are in.
Using data from Macau (biggest casino city in China), I forecast that casino revenue will be down ~80% for the months of March, April, and May, and will only modestly recover afterward. Let’s assume, for the full fiscal year of 2020, $PENN experiences revenue decrease of 30%. Taking the revenue of 5.3B, at 70%, we are sitting at annual revenue for 2020 of 3.71B. The key here is to focus on the impact this will have to operating income. Here is what we get:
|Operating Income (Loss)||(100M)|
|Net Income (Loss)||(600M)|
Note: I did decrease the operating expenses by 30% for assumed variable expenses, but things such as SG&A I held constant.
$PENN Gaming is looking at a considerable loss for 2020. The operating income is used to service the interest expense obligations, but running an operating loss eliminates cash to service this. Per Moody’s, $PENN already drew the full amount of their revolving credit facility this month. What $PENN can do is use their cash balance (~$300M) and whatever they have left from the drawn credit facility to service the interest expense. Outside of those two, they’re fucked. The debt covenants prevent further debt from being taken on. The Net Loss does not even include the principal payments (totaling ~ 104.4M) that I highlighted in the cash flow from financing activity.
There is a reason Moody’s downgraded them.
If they get bailed out, my thesis changes.
Sure, my assumption didn’t do any quarterly pro rata, but you get the point.
tl;dr – $PENN 15p,14p, 13p, 12p, 11p (whatever your heart desires) 4/17
Discuss, and as always if this did not make any sense, ask away. Also, for the elite autists out there, lmk if I missed something.
I know I’m the IV hedge guy, and these have high IV, but I don’t care. As they say in the Big Short, “If we’re right, we’re right big.” $PENN to $3.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.