Caesars, bankrupt, rewards Loveman

Both sides in the Caesars Entertainment bankruptcy are playing hardball. According to Bloomberg News, senior bondholders don’t care for what Caesars is offering and want a bigger payday. “Investors who say they own $1.6 billion in Caesars first-lien notes hired law firm Debevoise & Plimpton LLP to negotiate for better terms, said My Chi To, a partner at the New York-based firm.” Time is on their side, as Caesars has until Monday to settle with its creditors. Back on Dec. 28, it had 39% of bondholders in support of its offer, well short of the magic number of 60% that is needed for its restructuring plan to go through. (Two-thirds approval is required by the bankruptcy court.) Caesars claims now to have 55% support.

The Debevoise-represented faction, however, is reported to be holding out for 100 cents on the dollar, not the 94 cents Caesars is offering. That’s not the only intrigue taking place. On Tuesday, KDP Investment Advisors reported that Caesars ” is in fact reducing the cash portion of the first lien holder settlement from an aggregate $413MM to $207MM, impacting recovery by 3 cents on the dollar.” The remaining $206 million is being dangled as an incentive for investors to approve the bankruptcy scheme. They’d get half of that $206 million if the two-thirds threshold is reached and the final $103 million if the bankruptcy plan clears all hurdles. “Thus, the group will still be entitled to a settlement that we value at 74 cents to 89 cents on the dollar.”

KDP wrote of CEO Gary Loveman‘s mice-and-cheese gambit, “The whole negotiation and restructuring process continues to be like a poker game. While management may think this coercion tactic will incentivize first lien note holders to accept the plan (before other parts of the plan are similarly taken away), first lien holders could call management’s bluff and hold out for more.”

The pain is reserved for second-tier and lower creditors who have to bend over and take it in the shorts as $10 billion in debt is simply handwaved away, reducing Caesars’ burden to $8.6 billion. Meanwhile, Caesars goes about negotiating sweetheart deals with itself as it prepares for conversion into a REIT. The operating company would pay but $160 million to rent Caesars Palace and $475 million for Caesars’ other two-score casinos. (Stalking horse Caesars Acquisition Co. paid $2.2 billion for Harrah’s New Orleans, Bally’s Las Vegas, The Cromwell and The Linq alone.) Capex maintenance costs would be capped at $175 million a year. If you think this is the most byzantine deal “that has ever gone on in the gaming world,” Macquarie Securities analyst Chad Beynon has your back.

Reports Howard Stutz, “The companies would each have first right of refusal on new projects – the operating company to manage any new property owned by the REIT, and the REIT to own any new property developed by the operating company.” (Like that’s gonna happen.)

Stutz also posits that Caesars Interactive boss Mitch Garber is Loveman’s heir apparent. The company could do worse — and has, having renewed Loveman’s contract through 2016 and giving new meaning to “failing upward.”

One move that could palliate creditors is the folding of Little Caesars, Caesars Acquisition back into Big Caesars, thereby returning valuable assets and pumping up Big Caesars worth. It could also make claims of a fraudulent conveyance go away, further smoothing the bankruptcy process. It’s now a question of whether first-tier creditors decide a mediocre settlement is better than none.

Bankruptcy? What bankruptcy? Instead of settling up with debtors, Caesars is paying for a 40% stake in an $839 million casino in South Korea. That’s on top of $96 million for the land. Caesars’ plan is to start construction in July, with an eye toward being open in time for the 2018 Winter Olympics. I can think of some second-tier bondholders who wish that Caesars’ $336 million commitment were being lavished on them instead.