Not yet. "We really could talk this monstrosity to death for the rest of our lives. We’re not going to. We’re going to finish this now," said federal bankruptcy Judge Benjamin Goldgar, referring to an upcoming creditor vote on Caesars' restructuring plan. As matters presently stand, Caesars has until Aug. 29 to reach an agreement with its bondholders or else litigation against the company will be allowed to proceed.
The hot-button issue is the transfer of high-value Caesars assets to subsidiaries for rock-bottom prices. For instance, in subdividing the company into Caesars Entertainment Operating Co. (CEOC) and Caesars Growth Partners, the former sold the latter the company's centerpiece Total Rewards marketing program for the princely sum of $0.00. It also released those responsible for the transactions from potential liability. A court-appointed examiner, after plowing through millions of pages of Caesars documents, identified $5 billion in potentially fraudulent asset transfers. Junior bondholders put the value of those dubious transactions closer to $13 billion, and have lawsuits pending in Manhattan and Delaware.
Caesars' own investigation of the probity of its actions was junked last April by Judge Goldgar, due to some bedroom antics. Financial advisor Melissa Knoll had been carrying on an affair with Caesars-retained attorney Vincent Lazar. "She was sleeping with the enemy," ruled Goldgar. "Because the investigation is tainted in this way, there isn't any point in pursuing it."
The junior creditors contend that Chairman of the Board Gary Loveman and the private-equity funds controlling the company split it into a "good Caesars" and a "bad Caesars" (CEOC), with the latter holding all the toxic assets, which include the vast majority of Caesars' casinos. (Caesars exempted a few of its casinos from CEOC, including Harrah's New Orleans, Planet Hollywood Resort and joint venture Horseshoe Baltimore.) The junior bondholders – who are dominated by investments like Appaloosa Management – are further irked by Caesars' stance that it is no longer obligated to honor CEOC's debts.
While junior creditors would have to settle for 48 cents on the dollar, senior ones can afford to be more sanguine. Caesars has promised to make its senior bondholders whole. This would be accomplished, in part, by converting CEOC into a real estate investment trust, in which the senior creditors would hold an equity stake. REITs are required, by their very nature, to pay 90 percent of all taxable income to shareholders in the form of dividends. This makes them a popular tax shelter, one that MGM Resorts International and Penn National Gaming have adopted.
Were CEOC to reform as a REIT, senior debtors would be directly on the receiving end of the cash spigot. The company has also proposed to re-merge CEOC with Caesars Acquisition (the former Caesars Growth Partners), bringing valuable assets back into the fold.
In the process of shedding $18 billion in debt (out of a total of $21 billion in long-term debt), Caesars owners Texas Pacific Group and Apollo Management would be willing to reduce their shares from 50 percent to 30 percent. That's not good enough for creditors like Appaloosa fund manager David Tepper, who wants to see TPG and Apollo forfeit their stakes in the company. For its part, Caesars wants creditors to release the company from any liability, should the reorganization plan be accepted. It has also offered to discharge potential liabilities by ponying up $4 billion. It would have the cash for the latter once this week's $4.4 billion sale of Caesars Interactive closes.
The two sides in the Caesars bankruptcy haven't budged in any meaningful way from their respective stances since CEOC filed Chapter 11 and it would be a surprise if Judge Goldgar's Aug. 29 deadline brought resolution. "This court battle is far from over and anyone who thinks they know what's next are probably mistaken," wrote Motley Fool columnist Travis Hoium. "This court battle is already well over a year old, and I don't think we're all that close to a conclusion, even with the increased offer to debt holders. And now that the 'good Caesars' is starting to see improvements in its operations in Las Vegas … it would make sense for debt holders to want even more, since they think the entire Caesars Entertainment business should have been taken into bankruptcy."
There is a ray of hope for Caesars, albeit a complicated one. On Aug. 1, it announced it had reached agreement with an unspecified group of second-lien note holders to support the bankruptcy plan in return for compensation on a sliding scale from 46 cents on the dollar if 50.1 percent of junior creditors support the plan to 55 cents on the dollar if 100 percent come aboard. They would also be issued new debt and an equity position in the reformed Caesars. It doesn't seem like a very rich deal but it's probably the best news Caesars has had to declare in a while. According to the Wall Street Journal, Judge Goldgar's final ruling on the Chapter 11 filing will probably come in January 2017.
