Caesars Entertainment's (NASDAQ:CZR) largest subsidiary, Caesars Entertainment Operating Company, is finally heading into bankruptcy and now the battle over control of the company moves to the courts.
Management of Caesars has agreed with 80% of first lien bondholders on a restructuring of CEOC but that hardly ends the battle for the company. Junior bondholders are arguing that they have rights to not only CEOC's assets, but also assets spun out to subsidiaries like Caesars Growth Partners and Caesars Entertainment Resort Properties.
Let's just say we could be in for years of legal battles over the company, and I don't think this will end well for shareholders.
Why Caesars is going bankrupt
The start of the problems for Caesars came when TPG Capital and Apollo Global Management initiated a $30 billion buyout of the formerly named Harrah's Entertainment in 2008. The private equity firms loaded the company with debt and when the financial crisis and recession hit they were left scrambling just to stay afloat.
Caesars did manage to survive the recession with the help of extensive financial maneuvering and in 2012 completed a public offering of shares. But over $20 billion in debt still hung over the company and losses grew year after year. It was a downward spiral that had no end but bankruptcy.
What's interesting is that Las Vegas didn't drive the decline in Caesars' fortunes. It was actually regional gaming in places like Atlantic City, Iowa, Louisiana, and Indiana that led the company's decline. Increased competition and a weak economy ate into earnings, and Caesars wanted to find a way out from under these deteriorating assets.
Caesars shifts assets from one hand to the other
While operations were deteriorating, Caesars made a number of moves to restructure itself into a "bad company" and a "good company."
Good assets in Las Vegas, like Planet Hollywood, The Cromwell, The LINQ, Bally's Las Vegas, as well as online gaming assets were sold to Caesars Growth Partners. Part ownership in Caesars Growth Partners was then sold to the public in the form of Caesars Acquisition Company (NASDAQ:CACQ). In the process, private equity owners TPG and Apollo acquired proportional shares in the new company, hoping that even if the bad assets of Caesars Entertainment Company went bankrupt the good assets of Caesars Acquisition Company would leave them with some value. Below is an old, but still valuable org chart Caesars presented before Caesars Acquisition Company went public.
In the process of this shuffling, Caesars Acquisition Company took only about $2.3 billion in debt -- manageable given the assets it took with it. Caesars Entertainment was left with over $20 billion in debt and deteriorating assets with which to pay it.
But the shuffling wasn't over yet. Ceasars Entertainment also created a subsidiary known as Caesars Entertainment Resort Proprieties, which holds Flamingo, Paris, and Rio resorts in Las Vegas as well as Harrah's branded resorts in Atlantic City, Las Vegas, and Laughlin. This was another "good company" but was a wholly owned subsidiary of Caesars Entertainment.
What was left in Caesars Entertainment Operating company, the unit that filed for bankruptcy Thursday, were assets like Harrah's resorts in Reno, Philadelphia, and Council Bluffs, Iowa. The only desirable asset still under CEOC is Caesars Palace Las Vegas. The full list of properties as of Sept. 30, 2014 is below.
Why this will be a long battle for Caesars
Since all of this reorganization took place, the question was, "Is it legal?" The intention was clearly that most of the debt would stay with CEOC, which eventually would have to file for bankruptcy. That's what happened Thursday.
But debtholders are arguing that assets moved into Caesars Growth Partners and Caesars Entertainment Resort Properties, the "good companies," are part of what they should be able to recover. They provided debt before these assets were split off so they shouldn't be kept out of bankruptcy.
While Caesars likes to advertise that it has an 80% agreement with first lien bondholders, it should be noted that these are first lien bondholders in CEOC, and they're being made almost completely whole in the proposed restructuring. More junior bondholders will be nearly whipped out, while shareholders will still own the good assets under the Caesars umbrella.
I'm not a bankruptcy lawyer, but I have my doubts that the Caesars and first lien bondholders' restructuring plan will remain as-is given the shuffling of assets that was meant to keep bondholders away from Caesars good assets, retaining value for private equity firms. Once you go into bankruptcy even pre-approved agreements need to be approved by a judge, which is when junior bondholders can argue for a bigger piece of the entire Caesars pie.
I wouldn't get anywhere near Caesars Entertainment stock today given the uncertainty following this bankruptcy. There just aren't enough assets under the Caesars umbrella to pay back all debt holders, and I don't see the restructuring holding up. Combined, these things suggest this won't end well for current shareholders.