Inside Asian Gaming

inside asian gaming January 2015 30 Feature Caesars in Asia: The Empire Resets 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 in one or more of East Asia’s key gaming markets. 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 no matter how events unfold for the debt-laden giant in US 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$577 million on a golf course on Cotai in hopes a gaming license would be forthcoming. Rendering of the proposed Caesars Incheon Resort When the next opportunity came around, this time in Singapore, Harrah’s did pull the trigger but failed to make the cut in the intense competition that ensued for one of the two IRs that eventually went to Las Vegas Sands and Genting Group. So to be chosen as the first Western operator to develop in South Korea is clearly a coup. Not that it’s been a 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 billion of debt doubtless factored into it. Then at the end of 2013 the company was invited to apply again, and in March of last year won approval to include a foreigners-only casino as part of a megaresort complex on Yeongjong 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 and possibly increase tolerance for higher leverage.” They could be “especially enticing,” the firm suggests, for “highly leveraged gaming companies looking to de-lever and/or raise liquidity”—which obviously explains the attraction of the model for Caesars and, it hopes, to the many people to whom it owes money. 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. The snag, of course, is the debt, and to sweeten the deal, in addition 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 also will provide first-lien noteholders with additional equity in the REIT through a secondary rights offering that pays them a fee if they agree to underwrite it. Whether this would be enough remained to be seen as 2014 drew to a close, and late in December, the corporate brain trust proposed yet another controversial transfer of assets—this one will see Caesars 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 to be contested in the courts as it requires CACQ shareholders to swap their holdings at a significant discount to the stock’s current price and, more pointedly, 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 the US state of Delaware by a trustee of second-lien bondholders owed more than $3 billion. It’s one of two suits challenging the 2012-2014 asset transfers. The trustee’s action accuses the company of engineering a “good Caesars” with lower debt and valuable assets and the “bad Caesars” destined for Chapter 11. The second case was filed by senior bondholders led by hedge fund giant Elliott Management Corp. The creditors in that case want a judge to appoint a receiver for CEOC. Caesars denies any wrongdoing and claims the transfers were allowed under its debt contracts. The company, moreover, accuses its adversaries of maneuvering to improve their bargaining positions and

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