Caesars asset shell game has analysts warning investors to tread carefully

caesars-entertainment-asset-shell-gameThe asset shell game being played by debt-laden casino operator Caesars Entertainment is coming under fire from some of its creditors. Late last month, Caesars announced that certain “unidentified note holders” had hired lawyers in a bid to force Caesars to undo moves to transfer its more profitable assets away from the heavily indebted mother ship Caesars Entertainment Operating Co. (CEOC) to its Caesars Growth Partners (CGP) escape pod.

Having failed (until very recently) to establish any presence in the lucrative Asian market, Caesars carries an industry-high debt load of around $23b. In 2013, Caesars created CGP, into which it transferred its Caesars Interactive Entertainment (CIE) online gaming division, the Planet Hollywood casino in Las Vegas and the under-construction Horseshoe Baltimore. Last month, Caesars announced it was ‘selling’ four more brick and mortar casino properties to CGP for $2.2b, a deal that required CGP to borrow around $1.3b to finance.

The unidentified bondholders want to reverse this and every previous transfer to CGP because Caesars has breached its “fiduciary duties” to creditors. The complaint accuse Caesars of attempting to shield profitable assets from what most observers view as a more or less inevitable bankruptcy filing, which would leave note-holders unable to make claims on the portions of Caesars that actually make money.

Caesars insists these claims have no merit, but New Albion Partners analyst Anish Vora believes Caesars investors are “getting sliced and diced right now. A judge might deem these illegal transfers of assets.” Over three-quarters of Caesars’ debt is held by CEOC, which now consists of just one property in Vegas (Caesars Palace), four Atlantic City casinos and Caesars’ numerous regional casinos, which are among its worst performing properties. Late last month, Caesars announced it was closing its Harrah’s casino in Tunica, Mississippi due to poor performance.

Meanwhile, Caesars is looking to raise a quick packet by selling an additional 7m shares – plus an extra 1m if the first batch sells out – to the public. Assuming P.T. Barnum was right and the entire allotment sells out, Caesars stands to earn around $170m. Caesars says it will use the proceeds to pay down debt, but Caesars has already announced plans to give away $100m in what amounts to a bribe for anyone foolish enough to lend the company more money.

In order to allow CGP to raise the money to pay for those four casinos, Caesars is offering to pay 1.3 percentage points above market rates if someone will bite on $1.18b of seven-year term loans. CreditSights Inc. analyst Chris Snow told Bloomberg the extra $100m or so amounted to a “Caesars premium,” i.e. “there is a risk of [the casinos] being clawed back in case of a bankruptcy at the operating-company level.” Snow said lenders also needed to be aware that “the sponsors would move to protect their interest over that of the creditors if operating trends go the other way.”