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The day of reckoning may finally be here for Caesars Entertainment (CZR) after a judge ruled the company will have to face $11 billion in bondholder lawsuits. While the fate of Caesars' complex web of companies is not set in stone, it's much more likely that the entire entity will end up in bankruptcy. That's something I've been saying was a possibility since the company went public more than four years ago. Here's a look at why investors won't want to put their money anywhere near this company.
Debt finally sinks Caesars Entertainment
Since early 2015, Caesars Entertainment's largest subsidiary, Caesars Entertainment Operating Company, or CEOC, has been in bankruptcy. That isn't changing with the latest ruling -- what's moving forward is lawsuits questioning the creation of CEOC in the first place.
I went into detail about the transaction here, but the short story is that in 2013, Caesars Entertainment created a "Good Caesars" with some of the company's best assets and a reasonable amount of debt, and a "Bad Caesars" dominated by poorly performing regional gaming assets and a majority of the debt balance. Bad Caesars was the soon-to-be-bankrupt CEOC, and Good Caesars was owned by Caesars Entertainment. Part of it went public as Caesars Acquisition Company (NASDAQ: CACQ).
Bondholders sued, because when they offered debt to Caesars Entertainment, it was not under the agreement that Caesars split into multiple entities but the company as a whole. That way, if Caesars went bankrupt, they would have a claim on all of its assets. They argue that creating CEOC and allowing that subsidiary to go bankrupt kept other key assets out of their reach. Caesars Entertainment countered that CEOC should be allowed to restructure without facing the legal battle.
However, bondholders insist that the legality of the creation of CEOC in the first place should be determined before they're forced to potentially settle for less than they're owed. After a court examiner said that the creation of CEOC was likely fraudulent and that owners may be responsible for $5.1 billion in legal claims, it became all the more likely that bondholders would win and the lawsuit would go forward.
And that's where we stand today. Caesars Entertainment will have to explain why the creation of CEOC and other companies was above board. Otherwise, the company loses all leverage it had in bankruptcy.
No easy way out
With legal proceedings against Caesars Entertainment moving forward, bankruptcy may be the only way out for the company. Debt levels are simply too high, and it's likely the web of transactions completed in 2013 will have to be undone somehow. That'll be costly for the company, and it doesn't have money to make bondholders whole again.
There's still a possibility that some settlement can be reached among the various parties, but the chances are shrinking every day. Caesars Entertainment was built on a house of cards four years ago, and today, the enterprise is starting to crumble. Investors won't want to be there if it all comes crashing down.
