Sorting out Caesars: How company slid into distress, and what’s next

An exterior view of Caesars Palace, June 6, 2013.

The financial mess consuming Caesars Entertainment has been years in the making.

The casino company has struggled with more than $20 billion in debt for about six years. It's lost money every year since 2009, largely because of its debt payments.

Now, the largest (and most indebted) unit of Caesars is apparently preparing to file for bankruptcy. That doesn’t mean Caesars, the largest operator of casinos in the United States, will cease to exist; it will, presumably, emerge on the other side as a restructured company.

The situation isn’t easy to understand, especially because many details are under wraps while the company negotiates with creditors. But extensive reporting from Laura J. Keller at Bloomberg News, company filings with the Securities and Exchange Commission and analyst comments help clarify some of the complexity.

Why does Caesars have so much debt?

A lot of it comes down to bad timing. In January 2008, Caesars (then Harrah’s Entertainment), was acquired by private equity firms Apollo Global Management and TPG Capital for $30.7 billion.

The company’s current long-term debt is smaller than the price of that transaction — more than $25 billion — because the equity firms put up cash to pay for part of the buyout. The rest was financed. Alex Bumazhny, an analyst for Fitch Ratings, said it’s “like buying a house with a mortgage: The house is worth $100,000, you borrow $90,000 and put in $10,000 of your own money.”

Months after the buyout, the global financial crisis hit in full force. Casinos, like many other businesses, took a huge hit as customers cut back their discretionary spending — even today, the U.S. gambling market has yet to return to its pre-recession strength. Caesars, because of its massive debt, is acutely impacted by that reality.

Before the recession, Caesars executives predicted that the company could pay back the debt under a schedule arranged at the time of the buyout if revenue growth continued at the same rate it was at the time of the deal. But the market downturn changed all that.

So just how bad is the company’s financial situation?

Pretty bad. Caesars’ total debt is significantly larger than that of any other company in the casino industry. It's far from making a profit right now, too: During the most recent quarter, Caesars reported a $908.1 million loss compared to the year before.

Outside Las Vegas, American casinos generally aren’t performing too well. Take Atlantic City, for example. Caesars used to operate four casinos there until it shuttered the Showboat this year, succumbing to the poor economic climate of a gambling city that, like Caesars, has yet to return from its recession-induced slump.

In a recent securities filing, Caesars admitted that these issues aren’t going away.

“As a result of our debt service requirements and a general decline in our gaming activity since 2007, with Atlantic City properties and our regional markets being more heavily impacted by this trend, we have experienced substantial operating and net losses in recent years,” the company wrote. “We expect to experience operating and net losses for the remainder of 2014 and the foreseeable future.”

In fact, Caesars said in the same filing that its largest unit will run out of cash in the fourth quarter of 2015 if it doesn’t restructure its obligations somehow — like through bankruptcy. Caesars Entertainment Operating Company, which owns Caesars Palace, experienced negative operating cash flow of nearly $550 million through the end of September, according to the filing, which was first reported by Bloomberg.

Caesars said in the filing that its operating unit “does not currently expect that its cash flows from operations will be sufficient to repay its indebtedness and will ultimately need to pursue additional debt or equity offerings or seek a refinancing, amendment, private restructuring or a reorganization under Chapter 11 of the Bankruptcy Code.”

How would a bankruptcy play out?

It depends on what, if any, plan emerges from negotiations with creditors.

According to Bloomberg, Caesars has been talking with key bondholders and another group of creditors to restructure the operating company’s debt, which accounts for more than $18 billion of the total. The operating company is one of several subdivisions of Caesars, along with arms that own such properties as the Flamingo, Paris and Planet Hollywood resorts, as well as the Linq Hotel.

Caesars divulged one plan in another securities filing this week. The company said it presented creditors with a proposal to turn the operating company into a real estate investment trust, or REIT, a type of organization that is legally required to distribute at least 90 percent of its taxable income to shareholders.

Under that plan, the operating unit would become two companies, one to own property and another to manage it. Some of the top creditors could recoup 100 percent of their money, while others could get back more than 93 percent.

Caesars said in the filing that it’s still making proposals to creditors.

What will bankruptcy mean for Caesars customers?

Not much. Analysts say Caesars should keep its properties open during bankruptcy proceedings.

Caesars spokesman Gary Thompson couldn’t comment on the debt restructuring efforts but said that, if the company does go through bankruptcy, there wouldn’t be any change in the way properties are run. He said the Total Rewards program would remain intact as well.

“If what has been speculated about does in fact occur, then it would be a seamless transaction as far as customers are concerned,” he said.

The same can’t be said for employees, however. Caesars already announced that it’s laying off less than 1 percent of its 68,000-person workforce.

When will this all happen?

Bloomberg reported that the company could file for bankruptcy by mid-January, but it depends on whether a final agreement is reached.

Bumazhny agreed that Caesars will go through bankruptcy, but was skeptical about the timing. And he wasn’t so sure that it would be a prearranged deal, either.

“We don’t really think that’s necessarily going to happen in January, but we do feel strongly that there will be bankruptcy eventually, and the company did say they have to have some reorganization,” he said. “Given the complexity of the capital structure, a prolonged bankruptcy, we still think, is probably more likely what’s going to happen.”

A prearranged bankruptcy would be a much speedier process because Caesars and creditors would agree on how the company should be restructured. Bumazhny said that could take weeks.

If the restructuring plan isn’t agreed upon beforehand, the process would be more complex from a legal standpoint and would drag on for much longer. When Station Casinos filed for bankruptcy, for example, it took more than a year.