The drama never seems to end at Caesars Entertainment Corp (CZR). The company's largest subsidiary, Caesars Entertainment Operating Company (CEOC), has been in bankruptcy since early 2015, and it seems there's been little progress in either restructuring the company, or dragging all of Caesars Entertainment into bankruptcy. Of course, shareholders and private equity companies Apollo Global Management and TPG, who took the company private and still hold a large percentage of shares, don't want to see bankruptcy in their future.
Another effort to save the company was made on Wednesday, September 21 after Caesars Entertainment increased its offer to second lien bondholders. But it may not be enough given the billionaire leading the charge against Caesars Entertainment.
A new offer emerges
CEOC's bankruptcy proceedings are really about two things: why the company is bankrupt in the first place, and who gets what if bankruptcy is settled.
On the compensation side, first lien noteholders and banks have long been offered nearly all of what they're owed in a restructuring. And they've gone along with the proposals from Caesars Entertainment as a result.
The holdout group is second lien noteholders, who fall further down in the pecking order of debt but are led by billionaire David Tepper. This group is arguing that CEOC and Caesars Acquisition Company (NASDAQ: CACQ) shouldn't have been created in the first place, and that all of Caesars Entertainment and Caesars Acquisition Company's assets should be available to them in bankruptcy. An examiner's report ordered by the bankruptcy court concluded:
The principal question being investigated was whether in structuring and implementing these transactions assets were removed from CEOC to the detriment of CEOC and its creditors.
The simple answer to this question is "yes." As a result, claims of varying strength arise out of these transactions for constructive fraudulent transfers, actual fraudulent transfers (based on intent to hinder or delay creditors) and breaches of fiduciary duty by CEOC directors and officers and CEC.
That puts Caesars Entertainment and its private equity owners in a tough spot, potentially liable for $5 billion in legal claims if transfers are found to be fraudulent. That's why the offers to settle bankruptcy keep rising.
Second lien noteholders were offered $0.46 on the dollar in a restructuring package in August, but they didn't see that as enough, largely because of the information I pointed out above. This week, Caesars Entertainment said it increased the offer to second lien noteholders by $1.6 billion from a combination of sources:
- Caesars Entertainment will contribute an estimated $954 million in equity contributed by Apollo Global Management and TPG Capital plus another $92 million from new Caesars Entertainment shares.
- $100 million will be contributed by individual directors and officers through insurance funding.
- First lien banks and noteholders will contribute a small amount as well to get a better offer for second lien noteholders.
Note that things have gotten so bad for Caesars Entertainment and its billionaire private equity owners that they're willing to dip into their own pockets to settle bankruptcy. And insurance companies see fraud claims as such a risk that they're willing to dole out money as well. An agreement on the bankruptcy would include dropping lawsuits against Caesars Entertainment, Apollo, TPG, and directors, so the fact that they're putting money up to get a deal done means they're desperate. And with court opinions working against them, it's easy to see why.
If that doesn't give credence to Tepper's opinion that Caesars Entertainment should be bankrupt, I don't know what does.
This doesn't get Caesars Entertainment anywhere
A new offer to different counterparties in CEOC's bankruptcy might be seen as good news for shareholders today, but it doesn't really get us anywhere. I don't see Tepper budging on a small increase in the offer because at this point, if Caesars Entertainment as a whole went bankrupt, he may get a full recovery of the debt he holds.
I don't think Caesars Entertainment's shares are any more attractive today than they were a week ago, and unless Tepper gives in, it's likely the company could be dragged into bankruptcy. Given the desperation Apollo, TPG, and insurance companies are showing in the latest offer I don't think they like their position, which doesn't bode well for shareholders long term.