IAG JANUARY 2015 - page 30

Caesars inAsia:
You have to think Caesars Entertainment CEO
Gary Loveman spares more than the occasional thought imagining
what a different company he’d be running with a destination-scale
casino inoneormoreof East Asia’s key gamingmarkets.
Of course, these days he’s doing a lot more than daydreaming
about it, and as the company looks ahead to breaking ground in
South Korea this year on its first Asian IR, it’s clear that nomatter
how events unfold for the debt-laden giant inUS Bankruptcy Court,
the region is seen as integral to its future.
After famously declining to bid for a Macau concession in its
former life as Harrah’s Entertainment, Loveman & Co. later tried
to get in through the back door and burnt US$577million on a golf
course on Cotai in hopes a gaming license would be forthcoming.
Renderingof theproposed
Caesars IncheonResort
When the next opportunity came around, this time in Singapore,
Harrah’s didpull the trigger but failed tomake the cut in the intense
competition that ensued for one of the two IRs that eventually went
to LasVegas Sands andGentingGroup.
So to be chosen as the first Western operator to develop in
SouthKorea is clearly a coup.Not that it’sbeena smooth ride either.
Caesars was welcomed initially as an asset to the government’s
tourism-growth goals, only to be rejected for reasons that were
never publicized, although concerns about its industry-leading $25
billionof debt doubtless factored into it. Then at the endof 2013 the
company was invited to apply again, and inMarch of last year won
approval to include a foreigners-only casino as part of amegaresort
complex onYeongjong island.
Fitch, which is in the business of valuing corporate debt, sees
a lot of synergies: “The entrance of REITs into the gaming sector
will potentially drive up trading EV/EBITDA multiples, provide
new sources of capital (e.g. sales and lease-backs), create better
transparency on the value of physical casino assets and the gaming
licenses andpossibly increase tolerance for higher leverage.”
They couldbe “especially enticing,” thefirm suggests, for “highly
leveraged gaming companies looking to de-lever and/or raise
liquidity”—which obviously explains the attraction of themodel for
Caesars and, it hopes, to themany people to whom it owesmoney.
By Caesars’ calculation, breaking up CEOC would slash the unit’s
annual interest expense by approximately 75%, from $1.7 billion to
around $450 million. The key, of course, is selling senior lenders
on the future value of CEOC’s massive property holdings, most of
which they will likely own under a structure that is potentially more
profitable—certainly more liquid, as the Penn National de-merger
would appear to show—than the thousands of slot machines and
blackjack tables that sit on them.
Thesnag,ofcourse, is thedebt,and tosweeten thedeal, inaddition
to offering up Caesars Palace, CZR will kick in $1.45 billion, roughly
the total of its current cash and cash equivalents, and will guarantee
CEOC’s lease payments to the new REIT. It alsowill provide first-lien
noteholders with additional equity in the REIT through a secondary
rightsoffering that pays thema fee if they agree tounderwrite it.
Whether thiswouldbeenough remained tobeseenas2014drew
to a close, and late inDecember, the corporate brain trust proposed
yet another controversial transferof assets—thisonewill seeCaesars
Acquisition re-merge with CZR in an all-stock deal that ends the
former’s existence as an independently traded company and returns
its six casinos, including the newest Las Vegas Strip properties and
Caesars Interactive, to the corporate fold. But this looked almost
certain tobecontested in thecourtsas it requiresCACQshareholders
to swap their holdings at a significant discount to the stock’s current
price and,morepointedly, to its projected future value.
Holders of the company’s subsidiary debt haven’t been included
in the REIT talks, and they’re far from happy with all the financial
legerdemain that created CEOC in the first place—“looting” is what
some of them call it, and they want it reversed. Their claims are
included in a lawsuit filed in theUS state of Delaware by a trustee of
second-lien bondholders owedmore than $3 billion. It’s one of two
suits challenging the 2012-2014 asset transfers.
The trustee’sactionaccuses thecompanyof engineeringa“good
Caesars”with lower debt and valuable assets and the “badCaesars”
destined for Chapter 11.
The second case was filed by senior bondholders led by hedge
fund giant ElliottManagement Corp. The creditors in that casewant
a judge to appoint a receiver for CEOC.
Caesars denies any wrongdoing and claims the transfers were
allowedunder itsdebt contracts. Thecompany,moreover, accuses its
adversariesofmaneuvering to improve theirbargainingpositionsand
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