Divide and Conquer: Could Caesars' Debt Count It Out in New York?

Caesars Entertainment Corporation is one of the heavyweights in the competition for a casino license in New York, boasting a portfolio of top attractions in Las Vegas and Atlantic City and dozens more across the U.S. and overseas.

But the industry giant has lost some of its glitz in recent years, with several of its casinos shutting their doors, a streak of quarterly losses and a mountain of debt that is projected to lead the company into a major debt restructuring, if not an outright bankruptcy.

Now, with Caesars vying for a license to build a New York casino, on a site just 50 miles from the lucrative New York City market, the company’s financial struggles could adversely impact the evaluation of its bid by the state’s selection committee, which is currently weighing 16 formal proposals for the four full-fledged casinos authorized to be built upstate.

“It doesn’t necessarily rule you out, but it can be something that tarnishes your application,” Alex Bumazhny, a credit analyst with Fitch Ratings, said.

Representatives for Caesars dismiss concerns about the its finances, pointing to more than $3 billion in spending by the company over the past five years to open new properties in Ohio, Maryland and Las Vegas. At the end of 2013, Caesars owned and managed some three million square feet of gambling space, and 45 million people were members of its vaunted Total Rewards customer loyalty program.

The company has also touted the creation of more nimble affiliates within the corporate structure that have taken over many of its better-performing properties. It was one of these entities, in fact, that submitted the casino bid in New York.

“Caesars is pursuing a gaming license in New York through its Caesars Growth Partners entity, a company that was established to pursue growth opportunities,” a spokesman for the company’s New York proposal said in a statement. “The entity has very limited debt and would contribute the equity required to complete our proposed project.”

Yet it is unclear just how independent Caesars Growth Partners is from its debt-ridden parent company, Caesars Entertainment Corporation. And in turn, there is some disagreement as to whether a new Caesars casino in New York might bear any responsibility for helping pay down the parent company’s multi-billion-dollar debt.

The company’s current financial woes date back to 2008, when Caesars was taken private in a leveraged buyout. The acquisition loaded the company up with debt just before the financial crisis, which sent revenues into a tailspin as gamblers stayed home amid the economic downturn. While publicly traded casino companies were generally able to muddle though the Great Recession, private companies had a harder time surviving.

“The recession hit at a time when a whole bunch of casino companies were being taken private by private equity groups. So every one of those companies that took a casino company private went bankrupt, except for Caesars,” said Alan Woinski, the president of Gaming USA Corp, which supplies information to investors and professionals about the gambling industry. “They went private and then they were able to screw around with their debt long enough and did what we call ‘extend and pretend’—they extended out the maturities and just put new debt on top of old debt, and the pretend part is pretending that someday they’d be able to pay it off.”

Since then the company has been hemorrhaging hundreds of millions of dollars, including a whopping $1.76 billion loss in the fourth quarter of 2013, followed by quarterly losses of $386.4 million and $466.4 million to start 2014. Ratings agencies have downgraded the company to near default status. By the end of 2013, Caesars was bogged down with $23.6 billion in outstanding debt.

Company filings acknowledge that cash flow from operations will not be enough to pay down what it owes in the long run, and that it will eventually have to restructure or refinance its debt. Likely with that scenario in mind, executives have taken steps to protect their profitable properties—including any new casinos—by shifting them to entities such as the newly formed Caesars Growth Partners that are on more sound financial footing.

“We two years ago created a subsidiary known as Caesars Growth Partners, created with the purpose of funding our growth for new projects like the Baltimore project that opened just a few weeks ago, and this one,” Gary Loveman, the president, chairman and CEO of Caesars Entertainment, said during the company’s official presentation to New York’s casino siting board this month. “This entity has in excess of a billion dollars of cash today on its balance sheet, it is very lightly levered and therefore has very sound financial circumstances. And this project, Caesars New York, would exist within the Caesars Growth Partners category. This entity would generate more than $200 million to the state of New York and its various local constituencies.”

But that maneuver has angered creditors, who have found themselves saddled with a weaker set of assets while potentially being on the hook for bigger losses if the company goes bankrupt or refinances its debt. The battle over Caesars’ new entities and the sale of properties from one to another recently wound up in court, as bondholders sued Caesars last month for trying to protect its good assets from them. The company fired back with its own lawsuit blaming creditors for seeking a default that would benefit themselves at the expense of Caesars.

“The bondholders are trying to block all this stuff,” Woinski said. “They’re trying to get a whole bunch of things rescinded with Caesars, because they know exactly what Caesars is doing. They’re trying to get out from under and are basically saying, ‘All right, we’re going to leave all of our crappy properties in Caesars Entertainment, and they’re not going to generate enough cash flow—we’re going to bankrupt them and emerge without all your debt.’ ”

That doesn’t mean that the bondholders should prevail, Woinski added. They should have known the risks given the higher yields, he argued, so they “don’t really have a leg to stand on.”

Regardless of how the legal battle plays out, there is nothing stopping Caesars from moving ahead with its $880 million proposal to build a hotel and casino complex in Woodbury, N.Y. if it is ultimately selected by New York as one of the winning bidders. Companies typically continue to own their assets during a bankruptcy, and Caesars has been developing other new projects despite its debt problems, noted Bumazhny, the Fitch analyst.

“They addressed all the moving of assets or whatever they could do to protect healthier entities from bankruptcy,” he said. “So at this point all that’s left is really negotiating with the creditors of the weak entity to see if they could come to some kind of out-of-court agreement. They’re in that process right now.”

In the meantime, a cloud hangs over both the parent company and its related entities. In the worst shape is Caesars Entertainment Operating Company (CEOC), which Moody’s rated Caa3, nearly the lowest rating possible. Two other entities rated by Moody’s, Caesars Entertainment Resort Properties (CERP) and Caesars Growth Properties Holdings (CGPH), are at B3-negative, substantially better than CEOC but still with plenty of room to improve.

“Their negative B3 outlook reflects potential unintended consequences, should CEOC file for bankruptcy, because they’re all part of the same corporate family,” Peggy Holloway, a vice president at Moody’s, said. “All of these entities are part of the large corporate umbrella. The owners have tried to isolate assets in these other two entities to protect them from potential restructuring at CEOC. But the creditors of CEOC are fighting with Caesars about the different moves that Caesars has made.”

The various Caesars entities are closely intertwined, even though the company has taken steps to make them independent. Although Caesars Growth Partners submitted the New York bid, it did so in tandem with Caesars Entertainment Corporation as the operator. For accounting purposes the Caesars corporate family is still a single company, despite Caesars Growth Partners having its own executives and board of directors. Caesars Growth Partners did purchase its assets from Caesars Entertainment, but the parent company is obligated to absorb the affiliate’s losses and is also entitled to residual returns. And Caesars Growth Partners, like other Caesars entities, participates in the same Total Rewards program.

In the end, it will be up to New York gambling officials to determine how viable Caesars is and where its bid stacks up against its rivals. In Massachusetts, which like New York recently legalized casino gambling, Caesars was part of a venture that submitted a bid, but was ultimately dropped by its partners from the application process following a critical report by state investigators. In addition to raising concerns about Caesars’ partnership with a figure with alleged ties to Russian organized crime, the investigators for the Massachusetts Gaming Commission flagged the company’s huge debt burden and high interest payments that cut into its cash flow. Caesars dismissed the report’s conclusions as arbitrary and unreasonable, but the company ultimately lost its chance to expand into that state’s untapped market.

“In an effort to address its financial situation, Caesars announced plans to transfer certain assets to a new publicly traded company known as Caesars Growth Venture Partners,” the investigators’ October 2013 report stated. “Financial analysts have expressed concerns about this component of Caesars’ future operations.”