Caesars Entertainment Operating Co Files for Chapter 11 Bankruptcy in Chicago
Caesars Entertainment Operating Co. filed for Chapter 11 bankruptcy on Thursday, touching off a what is certain to be a lengthy court battle over $10 billion in debt. Caesers Entertainment Operations Co (CEOC) is a division of Caesars Entertainment, the largest American gaming company, which is saddled with $23 billion in debt.
CEOC holds about $18.4 billion of that debt. It filed for bankruptcy protection in Chicago. The plan it filed calls for roughly $10 billion of CEOC’s debt to be eliminated, while the operations division of Caesars would be split into two separate entities.
Gary Loveman Gives Assurances
Caesars CEO Gary Loveman spoke Thursday on the impending bankruptcy case. He assured the public that the company’s 50+ hotel-resorts will continue to operate. Player loyalty points will continue to accrue, while the company’s many venues will continue to host events and all scheduled corporate meetings. Furthermore, the company’s lineup of on-stage entertainers will continue to perform, according to regular schedules. Caesars Entertainment also intends to continue paying its various suppliers in full, throughout the bankruptcy process.
Loveman released a press statement which said, “I am very confident in the future prospects of our enterprise, which will combine an improved capital structure with a network of profitable properties.”
Long-Anticipated Bankruptcy Filing
This bankruptcy filing has been anticipated for a long time, despite Loveman’s assurances to the contrary. Financial analysts and op-ed pundits have predicted bankruptcy for Caesars, based on the $23 billion debt tag.
Cash flow is not a problem for Caesars Entertainment. The company has made $8.6 billion over the past 12 months. The problem is the debt interest payments have become such a large part of the financial picture that the company’s healthy business operations can no longer cover the difference.
Interest Payments on Debt Simply Too Much
Interest payments over the past year exceeded $2 billion, while the company has lost $3.5 billion. Facing such numbers, Caesars Entertainment has no choice but to declare bankruptcy.
The company’s troubles have been building for 7 years. In 2006, the company (then called Harrah’s Entertainment) was bought by Apollo Management, Texas Pacific Group, and the Blackstone Group. In January 2008, Apollo Management and Texas Pacific took the company private. That required a $20 billion buy-back of shares, which resulted in the massive debt the Caesars now faces.
How Caesars Went Broke
In good times, such a leveraged buyout would have made economic sense. When the real estate and financial markets collapsed only 8 months after the buyout, Caesars faced a massive financial meltdown. The past seven years has been about Gary Loveman’s company trying to invest and grow out of the debt, while the debt payments have slowly risen to the point growth is no longer possible.
Caesars Versus Shareholders
Under the bankruptcy plan, Caesars expects to create a new division of CEOC and give major shareholders equity in the new subsidiary. The announcement of bankruptcy could initiate a battle for control of the company, though, so all obstacles are not yet clear for Caesars Operation’s bankruptcy plan to take effect.
Friday Update
On Friday, a Delaware judge halted Caesars bankruptcy filing. Caesars claims that it has the support of its senior noteholders in its filing, but the separate filing in Delaware would suggest that isn’t the case. In fact, Reuters described the case as “an unusual legal standoff” and suggested that the Delaware filing was likely to “mark the start of a more public phase of complex and contentious debt negotiation“.
If so, then the fate of the Caesar Entertainment Operations Co. is likely to become one of the top stories in the U.S. gambling industry in 2015. Though Las Vegas Sands Corp, Wynn Resorts, and MGM Resorts have surpassed Caesars on the international gaming scene, Caesars Entertainment is still the largest domestic casino company. Not only does Caesars own the iconic Caesars Palace on the Las Vegas Strip, but it also owns more than 50 casino properties spread across over a dozen U.S. states.
Last year, Caesars closed down the Grand Tunica Resort in Tunica County, Mississippi. The company also shut down the Showboat Casino in Atlantic City. Gary Loveman put a positive spin on both closings, but they were signs that the company was facing serious trouble. When CEOC sold several casinos to the parent company last summer, some shareholders believed it was an attempt to shift assets from a troubled division to a protected one, in order to protect those assets from noteholders in a later bankruptcy battle. That move could become a key issue in the coming bankruptcy case. Delaware has the most advanced corporate legal system in the world, so one should expect to see the case play out in that state over the coming months.
