When the largest operating division of casino giant Caesars Entertainment filed for bankruptcy protection on Thursday, it was just the most recent piece of what has already been an intense and controversial path toward financial restructuring.
Expect more drama as the process moves forward.
For years, Caesars has struggled with a massive debt load, most of which is concentrated in the cash-strapped operating division called Caesars Entertainment Operating Company, or CEOC. That division is now seeking to reduce its $18.4 billion debt load by nearly $10 billion.
The bankruptcy plan voluntarily put forward by Caesars is complex on its own, but the situation is further complicated by a dueling involuntary bankruptcy case filed by junior creditors.
“This is going to be a long and contentious, protracted process,” said Alex Bumazhny, a financial analyst for Fitch Ratings.
Here are some of the most important things to know about where the bankruptcy process stands.
What does bankruptcy mean for Caesars customers and employees?
Caesars insists that business at its casinos continues as usual, as does its Total Rewards program. The company created an informational website about the restructuring effort in which it repeatedly hammers that point home.
“I want to emphasize that as we move through this process, all of our properties are open for business and continue to operate normally,” says Caesars CEO Gary Loveman in a video message posted to the website. “We have sufficient financial resources to continue operating as normal, including significant cash on hand. The business at our properties is sound, and they generate strong operating cash flows.”
In other words, casino customers shouldn’t experience anything different now that bankruptcy filings are making their way through the courts.
As for employees, Loveman also stresses in the video that the bankruptcy filing has no impact on their day-to-day job responsibilities. He says workers will keep receiving their pay and benefits “as normal.”
The company has already trimmed its employee headcount. In November, about one month before announcing the restructuring plan for the operating division, Caesars said it was laying off less than 1 percent of its workforce.
David Schwartz, the director of UNLV’s Center for Gaming Research, said it was “hard to say” whether more layoffs would result from bankruptcy restructuring.
“It all depends on whether layoffs would improve the company's positioning,” Schwartz wrote in an email. “I think for most line positions the answer is no, since lower staffing levels can lead to lower revenues.”
Which properties are included in the bankruptcy?
The Caesars parent company and its subsidiaries operates around 40 casinos, 18 of which are included in the operating division’s bankruptcy filing.
Of those, Caesars Palace is the only Las Vegas property included. Caesars Atlantic City, Harrah’s Reno and Harrah’s Lake Tahoe are among the others. Read the full list of the properties that are — and aren’t — in the filing here.
For some creditors, it's a sticking point that more Las Vegas properties are not owned by the main operating division.
In court papers filed in Delaware this week, lawyers for hedge funds which are junior creditors said Caesars transferred several properties — including a luxury tower at Caesars Palace, the Linq and Planet Hollywood — to affiliates for “unreasonably low” prices. Lawyers for the junior creditors said Caesars “plundered” the operating division of billions of dollars in value through those and other “suspicious” transactions.
What is Caesars trying to accomplish through bankruptcy?
Namely, Caesars wants to turn the overwhelming $18.4 billion debt bogging down the operating division into a more manageable $8.6 billion.
If the restructuring plan is instituted, it will turn the operating division into a real estate investment trust. Max Ehrenfreund, a writer for the Washington Post’s financial desk, explains in the newspaper’s Wonkblog why that’s attractive to Caesars:
“The plan to escape bankruptcy involves selling the operating company's land and buildings to a new entity, a real estate investment trust. The operating company will use the proceeds from the sale to pay down its debts, and then continue to run the tables while making regular payments on a lease to the trust, its newly created landlord. The trust, in turn, will provide a regular dividend to its investors.
"This strategy is a common way of taking advantage of the the odd quirk in the tax code that shields investors in real estate investment trusts from taxation, and of the fact that many investors prefer the reliable income from a lease to the more volatile income from a casino. And it's clear that Caesars management needs some way out.”
The debt Caesars is trying to shake off can be traced back to when the company was acquired by private equity firms in 2008. At around $30 billion, it was one of the largest leveraged buyouts in history, and the firms took out a lot of debt to fund the transaction.
Caesars thought it could handle the debt but, as lawyers wrote to a bankruptcy court in Chicago this week, both the casino industry and the economy at large were in much better places when the terms of the buyout were agreed upon. Then the global financial crisis hit, and it changed everything.
Lawyers for Caesars said in court documents that the operating division and its affiliates have “positive cash flow before debt service,” but that changes in the industry and the economy have left them “unable to support their overleveraged capital structure and extraordinary interest expense.”
Specifically, the gaming industry is getting a smaller share of consumers’ discretionary spending, and an influx of new casinos is saturating the market, the lawyers wrote.
“The Debtors’ substantial debt load has effectively prevented them from confronting these operational challenge,” they wrote. “Although the Debtors have invested in priority projects, they have been forced to raise and direct significant cash to debt service, money that could otherwise have been used for certain capital improvement projects such as hotel room remodeling, infrastructure renovations, and expansion of convention and amenities space.”
Why aren’t the court proceedings happening in Nevada?
Even though the Caesars headquarters are located in Las Vegas, the operating division filed in the U.S. Bankruptcy Court for the Northern District of Illinois, located in Chicago. And the junior creditors who filed the involuntary bankruptcy petition earlier this week did so in the bankruptcy court located in Wilmington, Del.
Lawyers for the junior creditors have argued that Delaware is an appropriate venue because that’s where the operating division is incorporated. Caesars lawyers have cited the company’s properties in the Chicago area as justification for choosing that court.
However, Peg Brickley wrote in the Wall Street Journal that legal precedent in Chicago may make that city a more favorable venue to Caesars’ interests.
Eventually, a judge will resolve the venue dispute. For now, a Delaware bankruptcy judge allowed the Chicago court to grant Caesars some routine initial relief, like the ability to keep paying its employees. But the judge put a stay on the rest of the Chicago proceedings while the Delaware case is considered.