Even Caesars Entertainment's (NASDAQ:CZR) bankruptcy plans aren't going to be a straightforward process, much like its operations since it became a public company once again. Today, hedge fund Appaloosa Investment LP and other second lien debt holders asked a bankruptcy court to approve an involuntary bankruptcy for the company's largest subsidiary, known as Caesars Entertainment Operating Company.  

This continues nearly a year and a half of asset transfers, lawsuits, and bankruptcy negotiations in a battle of giants in the world of finance. A lot is at stake for the biggest gaming company in the U.S., and some of the biggest players in finance have a lot riding on what happens next.

What's at stake
At the heart of the tussle over Caesars Entertainment is a company with $25 billion in debt and a business that hasn't been profitable since before the recession. What's less clear is who has claims over what assets if/when the company does go into bankruptcy. Private equity firms TPG Capital and Apollo Global Management, which bought out the former Harrah's Entertainment and loaded it with debt, have spent the past year and a half moving assets and creating subsidiaries in order to keep as much value as possible.

Here's what I mean by the muddled org structure. The image below is from a proposal before Caesars Acquisition Company was split off, and you can see that some assets went with this "good company" while most of the debt stayed under CEOC, the "bad company".

Image source: Caesars Entertainment SEC filing.

Since this image of the structure was released, more assets were transferred to Caesars Growth Partners, out of the reach of debt holders like Appaloosa -- at least for now. Multiple lawsuits were filed calling this transfer of assets illegal, which is part of the reason Caesars Entertainment just acquired Caesars Acquisition Company in an all stock deal.

But even after the acquisition of Caesars Acquisition Company, second lien debt holders of CEOC won't have claims over all of Caesars assets. That's why they're trying to force an involuntary bankruptcy and move into the driver's seat over bankruptcy negotiations.

A done deal that isn't as done as you think
This filing comes just as Caesars Entertainment gained the approval of two-thirds of first lien bond holders to restructure CEOC into a REIT and an operating company, reducing debt from $18.4 billion to $8.6 billion. In the process, first lien bondholders would make a reported 93.8 cents on the dollar, and second lien bondholders would be nearly wiped out.  

You can see why Appaloosa and those with more junior debt may not be fond of the plan, especially since the "good company" assets are still out of their reach in bankruptcy. They would still be able to challenge this agreement in bankruptcy court, but it would be an uphill battle if first lien bondholders agree to the deal.

The giants locking horns over Caesars Entertainment
What's incredible about this pending bankruptcy is the number of big names involved in the negotiations. Below I've outlined just a few of the massive private equity and hedge funds involved in Caesars Entertainment in some way right now.

  • Stockholders -- Apollo Global Management and TPG Capital control Caesars Entertainment's stock, and have run the company since taking it private in 2008.
  • First Lien Bondholders -- Elliott Management, PIMCO, and Beach Point Capital Management are among the first lien bondholders. Elliott Management reportedly led a buyout of BlackRock's debt stake just last week to reach the two-thirds threshold needed to approve a prepackaged bankruptcy.  
  • Second Lien Bondholders -- David Tepper's $20 billion Appaloosa Investment LP hedge fund leads this group of junior debt holders.

With that much firepower fighting over one company, I'd bet this will be a long drawn out battle. Bankruptcy is rarely a clean process, and with so many vested interests and such a complex corporate structure it'll probably take a while to sort out all of the legal details.

In the meantime, retail investors would do well to stay far away from Caesars Entertainment's stock. Shareholders rarely do well in bankruptcy, and I don't think the "good company" assets that appear to belong to shareholders today will stay there. Bondholders have some claim over those assets and at the end of the day they have the control in bankruptcy.