Caesars sees quarterly net loss increase 78 percent

From the Review Journal:http://www.reviewjournal.com/business/casinos-gaming/caesars-sees-quarterly-net-loss-increase-78-percent

I read the transcript of the earnings call, there is still too much capacity in Atlantic City for what the market demands. Yet, Caesars is going to build a casino up in Orange County, NY. I gotta believe that there will eventually be some form of gambling at the Meadowlands.

Maybe Kickin' Chicken can explain the what the debt restructuring means, there are so many asset shifts and subsidiary companies associated with Caesars it made one analyst write:

“It makes investors heads spin at the dizzying pace of capital structure actions, asset sales to related entities and other not so arms lengths transactions in the structure,” Cappaert said. “But that is the point, in our opinion. It has become so complicated and so cumbersome that challenging these moves in bankruptcy would surely take years to sort out.”

 

I never knew they were looking to build a casino in Korea, that could be big. They are partnering with Lippo which is huge. But who knows if "preliminary approval" is really a big deal or not.

I skimmed through the prepared text but not the Q&A, I didn't really see anything new in there in regards to the restructuring but will read through it later. I agree with that research analyst quoted in the article and posted before that they'll just make it so worthless to challenge the restructuring in court that it'll be forced upon any holdouts by the rest of the bondholders who just want a quick exit.

Definitely sounds like they're looking to unload something in AC as well.

 

Loveman is pushing out debt terms to future years and borrowing additional sums to make minimum interest payments and avoid bankruptcy into 2015. Loveman is also shifting any assets with any value outside of the debt holding entities to hold onto the highest value of assets possible before the bankruptcy occurs. Stations Casinos did the same thing, reclaiming them for pennies on the dollar.

A personal finance equivalent is someone who continued to open and max out new credit cards and HELOCs to make minimal interest payments, while simultaneously gifting all of their assets to another family member to avoid losing the assets in an inevitable bankruptcy. When the music stops the debtholders (credit card companies) will be lucky to recover a few pennies and a portion of ownership in CET 2.0, stockholders will be wiped out and CET will exist with most properties in tact and a good chunk of debt wiped off the books under a restructed ownership.

 

there are several things going on

first they are trying to sell a portion of CEOC (the operating entity) to outside investors and they believe that in doing so it will make it where CEOC is no longer a wholly owned subsidiary of the parent company......if CEOC is no longer deemed to be a wholly owned subsidiary of the parent company then that allows them to pull the bond guarantees on the bonds owned by junior debt holders in CEOC

there are of course opinions on both sides of the spectrum as to whether or not the sale of a portion of CECO to others will make it no longer a wholly owned subsidiary or not and junior bond holders are lining up to challenge this and more are prepared to now join the fight because of this action

the second phase is to refinance the large chunk of debt that is due in 2015 that they have no possible way to pay off.....they have lined up some lenders for most of that, but those lenders want guarantees on that debt (about 1.75 billion) along with another 2.9 billion in existing first tier debt as well....they are looking to kick the can down the road to 2017, but with a "springing maturity" which basically means that if some junior debt is not paid off early the new loan springs forward and matures immediately upon the date that it was set for the more junior debt to be retired

CET is basically setting up (or trying to set up) a fight between junior and senior debt holders by removing guarantees on debt from junior holders and working deals on previously unencumbered properties with new debt holders and placing properties formerly used to guarantee junior debt holders into positions of guaranteeing senior debt and new debt

their theory is (I believe) that so far there have already been a ton of junior and even senior debt holders that have taken a haircut and many have exited the game already and new ones have moved in at a lower overall cost of that debt and CET believes they can move to capture a portion of that debt haircut back from those that hope they will claim it

say company A has debt at 100 cents on the dollar and says F this I am out of here I can make money elsewhere and sells it off at 75 cents on the dollar to company B......then B says F this and sells it at 65 cents down the road to C.......C sells at 55 cents to D and then D sells at 42 cents to E

in the view of CET company E should only care they are in for 42 cents on the dollar and thus if they come out whole at 42 cents on the dollar they should be happy or if they get 43 cents they should be ecstatic and if they get 38 cents they can make up that loss elsewhere on one of their other risky investments that turns around or on one of their stable investments that makes money

while company E has the idea that they make money not giving up and accepting 42 cents on the dollar for debt that has assets backing it that could be worth more and they don't just accept 38 cents on the dollar because that makes things easier for CET and for others......they will try and get 45 cents on the dollar even if it means a long drawn out fight or even if they end up with assets they have to operate or sell off themselves

CET feels they can keep kicking the can down the road long enough that either the economy will improve and they can ditch some of their debt, they can make enough down the road to offer company E 48 cents on the dollar for debt they bought at 42 cents and E will accept it and CET can clear that debt and improve their borrowing position and refinance other bonds in move favorable terms or they can ride it out until company E says F this I want my money invested elsewhere ans sells for 38 cents on the dollar to company F and CET hopes they can get company F to take 40 cents on the dollar down the road and retire that debt

it is like being on a 777 that is heading towards the ocean and everyone is staring at the others and pointing at the parachutes and saying "here is your parachute you can bail now and probably live if the rescuers find you in the ocean" and the others are saying "I can fly this plane, but I am not going to take over and fly this plane and save it for you while I only get a medal and a certificate of appreciation if I save the plane I am going to own part of the plane".......so they all sit and wait and the guys in first class at least get drink service while those flying coach only have those stupid skyviews magazines to read for entertainment while they wait for others to grab the parachutes and bail so they can stay around to fly the plane and take ownership of a piece of it

 

This is essentially what the majority of debt restructurings and buybacks come down to which is another reason it makes sense (however twisted) for a company to destroy value of certain entities. Ultimately distressed investors interests become more closely aligned with the company than with their fellow bondholders who were original lenders or bought in near par. Those guys are reluctant to accept any restructuring, in fact a lot of them are explicitly barred from accepting any haircut by their investment mandates (e.g. a lot of pension funds and other real money managers).

So they either have to sell and treat it purely as a market loss, have a restructuring forced upon them by the courts, or holdout and potentially be stuck with a holdout series of debt that no one is trading any longer (though that paper can pay out huge for some smart investors like Dart and Elliott who have made billions buying holdout debt).

But this is why distressed investors will rattle the company to take a hardline position with their own fellow bondholders, in order to shake them out and getting them to sell instead of going to court, and delaying a restructuring that they're happy, or at least willing to, accept.

 

I guess the broader question for a "babe in the woods" regarding sophisticated financial matters like myself is : Is this "business as usual" for big business and the street? Because if it is, perhaps we all better start stocking up on seed corn and ammo, 'cuz it probably won' be long until the next massive collapse hits, and they always seem to get worse...

I'm just sick to death of bald-faced con men and quick buck artists tanking the system, and then hiding behind the "let the market decide" and "regulating capitalism is despicable" arguments. Didn't we learn anything from the mortagage backed securities fiasco? Rant over.

Sorry, probably too political...I apologize for the above comments.

 

To some extent yes, at least when companies get big enough. One of the obvious benefits of securitization is spreading risk among a bunch of investors, but the drawback is their power also spreads thin. Creditors can be powerful when everyone is on board and they have a strong steering committee, but that usually isn't the case. How do you deal with getting hundreds if not thousands of different creditors on the same page? You don't have that complication with a single investor - e.g. Deutsche just took over Cosmo from the original developers, if there were 500 bondholders funding them they'd probably still be in place.

Not really, and part of the reason is because politicians and the media especially hyped it up to being a mortgage issue when that was just the thing most people could digest. But the problem was across all types of structured products, asset backed securities, default swaps, etc which for the most part still exist in the same form (and artificially help boost liquidity and demand for things like CET debt). They somehow convinced people that the credit crisis was due to poor people taking out loans they couldn't afford to buy houses. As long as you don't point the finger at the actual problem it doesn't get solved.

 

I agree with you and I think you're right... to comment further probably gets too political.

I always appreciate the takes of the above posters and a few others on VMB who obviously have knowledge and experience that I don't to put these kinds of articles in the proper context.

 

Really, what a great group ranging from the kind folks above who explained it in terms I could understand, to those who sleep in their cars and rock out to EDM, to seasoned citizens who tell kids to "get off my lawn", domestic and international..........what a fine group that makes up VMB!

It appears that Loveman wants to sell off 5% of CEOC and possibly seek a listing for this new entity, seems like another shell to keep this shell game going. When the news hit yesterday regarding pushing the maturity dates out, the stock went up.

I think I get it, just push out the maturity dates for debt that matures in the next year or two, lessen the risk of near term default by kicking the can down the road, the market sees this as a positive, the stock goes up.

 

Ha! Classic... great description of our group!

 

Yes, its pretty much how things work. When a company has a manageable debt it can be a spot where credits can have actual power and influence over the company, but if it keeps growing it can get to a point where it doesn't matter because the debt is so big that no one creditor can force the company to do anything and the company can regain control of itself by being in a lot of debt... thats pretty much where Caesars is at.

To a lot of people it might seem like Caesars does nothing but thats because they don't really need to do anything: their debt is so big that the company can push its creditors around if they wanted to and that gives them the option to restructure debt and/or make the creditors eat some of it.

Many do learn from this, but there are always new dummies to take their place.

The thing is that there are always going to be people looking for the next get rich quick scheme or an easy way to make money that they don't stop to think if something could be a scam or a bad deal... its why so many years later that whole Nigerian mail scheme stuff still works - when you hear of somebody being fleeced of millions you think "Geez, really? Has not everybody on the planet heard that was just a big scam?" yet as said, they still manage to get millions a year out of suckers.

 

For all their financial problems, CET has taken care of me very well. Much better generally than MGM. I have gotten tons of comps from CET. I guess I'd better make sure I use all my reward credits, though, because things look bad right now.

 

I would like to personally thank Kickin chicken, Someone, Viva Las Vegas and others whom I'm forgetting for their analysis as well. As someone who works in a totally unrelated field the breakdowns you guys give are invaluable. I am fascinated by this whole debacle and in Vegas finance in general.

It makes sense on a ridiculous level, but it is bizarre that you can owe so much money that the balance of power changes hand to the borrower. In the example given above by someone what are the legal ramifications of doing this "shell game" in your personal life? Can gifting your assests not be seen as blatant manipulation of the bankruptcy system and held against you? I think I remember hearing that such "gifts" can be revoked however there is a time limit in how far back creditors can go is this true?

Back to the subject at hand, what chance do any of these lenders have of ever profitting on the investment? If the situation is as bleak as it appears why does company E buy the debt for .40? I'm assuming the answer is that asset sale and recouping of the economy and earnings would render it such that the debt couple be repaid, but why would anyone purchase debt even at such depressed rates? It appears from what is being explained here that there is NO chance you would ever end up owning Caesars Palace.

Sorry for the basic questions but many of us just lack the fundamental understanding of how the financial world works, it is so diametrically opposed to how I run my personal finances its like bizarro world.

 

company E buys the debt because they feel they will either get paid enough over the long term to show a profit

if they get the debt for 40 cents on the dollar (lets say 40 cents a unit) and they get payments over time equal to 15 cents before it all blows up and then they get either payments after it blows up equal to 27 cents per unit well they got 42 cents per unit overall

or if they get ownership in the new company and that ownership pays out 27 cents per unit over time they are ahead......or if the new company without debt shows a profit and goes public and they sell out for 27+ cents per unit they are ahead

that is basically what The Donald did in AC......he had ownership, got paid "management fees", held a share borrowed a ton, sold some shares when things were good, borrowed more later to buy back some, things went bad lenders and share holders took a haircut....The Donald "took a hair cut" lenders took a stake in reorganized company share holders took a lesser stake.....The Donald collected management fees....sold some of his shares when times were good.....repeat until The Donald owns next to no shares, but still gets management fees

at the end of it all if The Donald had 100 dollars per unit spent if between management fees, shares sold when times were good ect if he ended up 7 years down the road collecting a total of 200 dollars per unit he doubled his money in 7 years who cares if he owned nothing of value at the end and was only getting management fees and then got pushed out.....he had doubled his money in 7 years which is good conservative investing

the same is going on with CET except really no management fees....Apollo and Blackstone thought they had a buy, consolidate, pump and dump opportunity until the economy hit

now they are trying to work out from that position and leaving others to take a bath

borrow.....collect some "deal making fees".......watch some creditors fall by the wayside selling the debt at reduced prices......move assets around to protect from a total loss of equity in BK.......borrow some more repeat until they are in a position to hold a large part of the assets left after a BK

the lenders and those buying the debt are banking on the fact that they will get a big enough stake to come out ahead especially after the BK is done and they collect profits from a debt free company and then sell shares

 

That's not a basic question, figuring out what its worth and what the recovery will be is the hard part. Otherwise everyone would do it. The fees that Someone wrote about are collected by the private equity firms (a total sham in some respects), but distressed investors gain or loss just comes down to recovery value. Investors will analyze a combination of things including potential asset sales and sustainable debt levels, both of which are open to interpretation. There likely will be an equity component, at least for certain tranches of debt. There are a lot of qualitative factors as well, like who are the major holders, how much leverage does each side have, what do you think the company will be willing to give, what do you think you have a chance of forcing through, etc.

You do everything you can to come up with a number, say worst case its worth 30c, base case its worth 50c, best case its worth 60c...just like gambling you come up with the odds for each scenario and you have your EV. That's the most you're willing to pay. But big restructurings like this have so many moving parts that it mostly comes down to just having good information on what's going on or at least enough experience to sense when a credit has gotten too cheap.

 

On a personal bankruptcy (7 or 13), if the judge discovers you've shifted assets you can have your case denied and could be charged with fraud. Most people are truly bankrupt who file, and may shift some nominal assets around to beat the low minimum assets allowed (varies by state).

In a business, it's a little more involved and more judgment is required than a simple case of trying to explain how $30k shifted from your bank account months before filing Chapter 7 or signing grandma's house over a few months before sending her to the nursing home.

Stations had a favorable bankruptcy ruling which prevented Boyd from offering more for a subset of Stations properties (the Fertittas already shielded their preferred properties such as Red Rock and Sunset).

Someone's posts about the current situation (and the Donald) is more detailed and a great synopsis of what is currently going on w/ CET.

MGM has big trouble with their level of debt, but at least they created something (City Center, and they were able to partner on a large portion of the building costs). What the hell did Loveman create beside a over leveraged soon to be bankrupt portfolio of poor casinos?

All the more reason to back someone like Wynn who actually created enormous value throughout the valley and put his own money (rather than screw others over) to build W/E and several preceding resorts.

 

Business and economics is political! We have posters that constantly defend moronic business decisions with the "myth of the free market". You were less political than they are. You also did not mention any political parties. Complements on a intelligent post.

 

I'm not even convinced that's the case anymore, though, remember that Wynn's putting most of his efforts in to Macau, and who's to say where the majority of the company's collectible assets are at this point (plus WYNN is publicly traded).

 

Steve Wynn was incredibly lucky, and was able to establish good relationships with some bank entities and mobsters (allegedly) that helped him early in his career. Steve borrowed a crap load of money from Valley Bank and was able to
execute on some strategic deals, and parlay that into wealth.

The Mirage was paid for partially by junk bonds issues to help cover construction costs, and a very risky proposition at the time. Truth of the matter, it could have gone either way for Steve W. Steve built a great product and knew how to deliver great service to people. That's why I believe his company has been so successfully. He aslo learned not to over leverage himself as he took more risk with Bellagio, Wynn, and Encore.

 

Wynn was among the first to use junk bonds, he knew Michael Miliken, maybe a connection through University of Pennsylvania? Wynn built the Golden Nugget in AC with junk bonds and then flipped it to Bally's at a nice profit, then went on to build Mirage.