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Casino Owner Caesars Redefines Itself, but Still Has Mountain of Debt

Casino Owner Caesars Redefines Itself, but Still Has Mountain of Debt

By STEPHEN J. LUBBEN

JUNE 12, 2014 3:26 PM Comment

Caesars Entertainment, the owner of several casinos, is taking a page from the Dynegy playbook. That is not meant as a compliment.

Dynegy, you may recall, entered Chapter 11 after two failed mergers and some radical redesigning of its corporate structure. The redone structure was rather clearly intended to salvage something for shareholders. But the court-appointed bankruptcy examiner found that Dynegy had gone too far.

Like many that have made the trip to bankruptcy court recently, Caesars was the subject of a leveraged buyout in 2008, just before the financial crisis hit. According to Bloomberg, availability on its line of credit was just $9.8 million at the end of March, compared with about $115 million at the end of 2013 and $317 million at the end of 2012.

Now, it’s trying to slice and dice its assets in a way that will save something for shareholders.

It has sold some casinos to Caesars Growth Partners, an affiliated company that was created only last year. It has bought back some debt at a discount to the face value, refinanced other debt and, most interestingly, sold a small piece of its operating company because — according to the Caesars’ interpretation — that would remove the parent company’s obligation on Caesars’ second lien debt.

And thus far, share prices would seem to suggest that its strategy is working. Both the senior and second lien debt is trading at less than par, despite otherwise attractive interest rates, but the shares are trading in the high teens. Nearly $18 recently.

That’s about $17 more than most companies headed for Chapter 11.

Maybe Caesars never ends up in bankruptcy, but it seems that it will eventually have to talk to its creditors. First, though, it wants to put its house “in order.”

Last week, some of the second lien debt holders decided that they had seen enough, and called a default. Caesars responded. It said it objected to the creditors’ move, calling it “baseless.”

But you don’t have to swallow all of modern finance theory to wonder if such extreme slicing and dicing of corporate structures really creates any value or if it is just intended to make life difficult for the creditors.

On the other hand, maybe the creditors are simply getting what they bargained for. After all, if they wanted to keep a particular asset pool together, there are certainly ways to do that by covenant.

And traditionally, junk debt comes with more covenants than investment-grade debt. Secured debt should provide more protection yet.

But all that changed in the years before the financial crisis, and now “cov light” second lien debt may just be at the bottom of the heap. In this case, it may even be below the equity.

It’s a new world out there. And Caesars still has a mountain of debt — about $21 billion as of the end of March.

 

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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