First off, don’t panic. Caesars Entertainment has serious financial issues at the moment but we do not regard potential default as one of them – at least not on the catastrophic scale whereby your money in the cashier’s cage would be forfeit. Caesars is in the process of trying to remove the guarantees on some of its secondary debt – which could be a prelude to a strategic default to reducing its obligations -- $23.4 billion worth. Or it could simply be a contingency measure. A group of Caesars bondholders has been trying to block the removal of the guarantees (along with a new loan) but their last hope is that Illinois regulators will nix the transaction … which seems unlikely.
Further complicating the issue are bondholders who are trying to force Caesars into default. "The creditors said the company defaulted on its obligations by transferring assets, such as Bally’s … hotel, to an affiliate, and by removing the parent company’s guarantee on the operating unit’s debt. There are $3.7 billion of the notes outstanding, according to a filing," reports Bloomberg.
"We will not allow our company, our employees and the communities in which we operate to be held hostage by a minority of holders whose interests are contrary to the long-term health of the company," CEO Gary Loveman thundered in response.
"Depending on the voting thresholds in the documents, the bondholders could file for receivership," resumes Bloomberg, "file an involuntary bankruptcy proceeding or foreclose."
KDP Investment Advisors’ Barbara Cappaert views this as a preliminary skirmish. In an investor report she wrote: "Bondholders are fighting back with whatever they can in order to better position themselves in an inevitable debt restructuring. Clearly the wheels are in motion for restructuring talks, even if they are starting out on a contentious note," she said.
It is difficult to summarize any financial transaction involving Caesars because the company has so many moving parts. There is Caesars Entertainment Operating Co., and Caesars Growth Partners, along with a couple of other entities. Caesars Entertainment has been selling assets to Growth Partners, setting off controversy over whether the company is transferring assets at fair market value. The second-lien creditors – a consortium of 13 funds, including the wonderfully named Contrarian Capital Management -- who are trying to force a default (hence the warning) are probably trying to preserve their loan guarantees before Caesars can remove them. We rate the likelihood of their success low.
The bottom line is that you can continue to patronize Caesars’ properties with confidence. We think the chances of a default are remote and those of a bankruptcy fainter still.
