Question of the Day November 21, 2014
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Q:With Caesars close to Chapter 11, I read where there was more than company. Caesars Palace is owned by one company, but the other hotels on the Strip (Harrah’s, Bally's, etc.) are owned by another company that is not in Chapter 11? Can you explain who owns what and what is going broke in Caesars land?
A:Most of giant Caesars Entertainment’s casinos and 80% of its debt are carried by Caesars Entertainment Operation Co., owner of Caesars Palace, Caesars Atlantic City, Harrah’s Reno, Harrah’s Tahoe, Harrah’s Joliet, Harrah’s Gulf Coast, Harrah’s Council Bluffs, Harrah’s North Kansas City, Horseshoe Southern Indiana, Horseshoe Council Bluffs, Horseshoe Hammond, Horseshoe Bossier City, Horseshoe Tunica, Louisiana Downs, Bally’s Atlantic City, Harvey’s Lake Tahoe, as well as international properties.
According to company spokesman Gary Thompson, "it also manages three tribal-owned casinos – Harrah’s Ak-Chin, Harrah’s Southern California and Harrah’s Cherokee – and Caesars Windsor (owned by the Ontario Lottery), as well as the minority-owned Horseshoe Cincinnati and Horseshoe Cleveland."
A subdivision is Caesars Entertainment Resort Properties, which owns Harrah’s Las Vegas, Harrah’s Atlantic City, Harrah’s Laughlin, Flamingo Las Vegas, Paris-Las Vegas, The Rio and the High Roller.
The most prominent spinoff is Caesars Growth Partners, which owns The Cromwell, The LINQ, Bally’s Las Vegas, Planet Hollywood Resort, Harrah’s New Orleans, online division Caesars Interactive, the World Series of Poker, WSOP.com and a 41% share of Horseshoe Baltimore. It may also get a piece of a joint-venture casino Caesars is developing in South Korea. (A complete – and dizzying -- list of Caesars’ subsidiaries can be found here.)
Caesars Growth Partners is like a babushka doll, as 58% is owned by Caesars Entertainment and the remainder by recently created entity Caesars Acquisition Co. Caesars Entertainment Resort properties also holds the Octavius Tower at Caesars Palace and LINQ Promenade shopping-mall properties. This is a flash point between Caesars and dissident bondholders, who are suing Caesars for a fraudulent conveyance. (As though to rub salt in the wounds, Caesars Growth Partners recorded a modest profit in the most recent quarter.)
Their lawyers wrote that Caesars was engaged in "self-dealing transactions" calculated to "move some of the company’s most valuable assets out of the reach of creditors." For instance, it accused the company of conveying $779 million asset Caesars Interactive for a mere pittance. (Planet Hollywood went for a bargain-priced $360 million.) "They’re taking some of these assets and moving them to high ground, and essentially allowing the flood to take the rest," was how CreditSights analyst Chris Snow put it to Bloomberg News. Or, as a Wilmington Savings Fund lawsuit stated, the company had been divided into a "Bad Caesars," swamped with debt, and a "Good Caesars."
Still-overhanging debt of $515.5 million will be assigned to an as-yet-unnamed subsidiary of Caesars Growth Partners, thereby purchasing Caesars Entertainment Operating Co. a little more forbearance from Wall Street. The two entities will, in essence, consult and pay each other half the management fees of Planet Hollywood and Horseshoe Baltimore under the guise of being unrelated companies. Caesars Growth Partners also gets first rights to pursue any project Caesars Entertainment Operating Co. deems unattractive.
Caesars has countersued its detractors, saying the dissidents were trying to force the company into bankruptcy. (Apparently a moot point now.) "It’s among the most complex — if not the most complex — credit situations in leveraged finance," Fitch Ratings executive Michael Paladino told the Wall Street Journal. Gaming analyst Alan Woinski minced fewer words in describing the relationship between Caesars and its affiliates: "All right, we’re going to leave all of our crappy properties in Caesars Entertainment, and they’re not going to generate enough cash flow — we’re going to bankrupt them and emerge without all your debt." He described the company’s debt-retirement strategy as "extend and pretend … they extended out the maturities and just put new debt on top of old debt, and the pretend part is pretending that someday they’d be able to pay it off."
"Caesars is burning through cash at a rapid rate." added Motley Fool analyst Travis Hoium. "Overall, Caesars is a mess, and I'd stay away from the entire group right now. Its private equity owners hold all the cards and are reorganizing the company to squeeze as much value for their investors as they can. That doesn't mean it will end well for you."
The company’s latest move has been to propose subdivision of Caesars Entertainment Operating Co. into a real estate investment trust (REIT). One half of CEOC would operate Caesars’ properties, the other would own them. "The REIT proposal would be part of the potential bankruptcy plan for the operating company, not in lieu of it, said a person familiar with the discussions. Bond holders might prefer the steady cash flow of a REIT rather than the volatility they would get by owning a straight stock," explained the Wall Street Journal. Fitch Ratings Director for Gaming, Lodging & Leisure Alex Bumazhny told the paper, "The REIT plan potentially could make the company more valuable."
It would be a good deal for senior bondholders, who’d receive 94 cents on the dollar in cash, debt and ownership in Caesars. Junior creditors would just get a small slice of equity, provided they agree to go along with the deal. But, as lenders continue to walk away from the negotiating table, less and less is certain about the future makeup of Caesars Entertainment.
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