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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
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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