Taxable Talk

Yesterday US Bankruptcy Judge Benjamin Goldgar ruled that various lawsuits against Caesars Entertainment can go forward. Caesars Entertainment Operating Company (CEOC) is already in bankruptcy; this ruling increases the chances that Caesars Entertainment Corporation (CEC) follows CEOC into Chapter 11.

“‘There is now the potential that this bankruptcy can get very litigious, complex and long,’ said David Tawill, president of the Maglan Capital hedge fund.”

So what does this mean? First, I don’t think there’s potential that the bankruptcy will get very litigious, complex and long; rather, there’s near certainty that it will. I earlier wrote that the bankruptcy would take “a long time” to resolve; I think that’s certain.

Additionally, that the other lawsuits are going forward is bad news for the current owners of CEC. Imho, they were hoping that they could create a “bad” company, get rid of a ton of debt, and emerge from Chapter 11 with something of value. That’s now less than an even bet.

Instead, the lawsuits are likely telling the truth: That CEOC was created as a way of shuffling assets. This means it is now more likely than not that the rest of Caesars will end up in Chapter 11.

That would put a stop to the lawsuits. It would also mean the current majority owners of CEC (Apollo Global Management and TPG Capital) will see the value of their investment go towards $0. It could also mean that some of the current assets of Caesars will end up being sold. The big problem with Caesars is their debt load. Bankruptcy will get rid of the debt, and many of the underlying assets have substantial value.

One last certainty: The lawyers involved will be making plenty of money.

Last week Caesars Entertainment Operating Company (CEOC) filed for Chapter 11 bankruptcy in Chicago. One week ago, second-tier bondholders filed an involuntary bankruptcy petition in Delaware. A company can only be in one bankruptcy court, so there’s an obvious issue: Which bankruptcy filing will “win”? And what will the future bring to Caesars?

I’m going to do some speculation in this post. Be forewarned that I am not an attorney, so my views are just that: my views on the topic. I was in corporate finance for many years prior to being in tax, so I am familiar with many of the issues involved.

First, not all of Caesars is in the bankruptcy filing. Caesars split into two major entities, and only CEOC is in Chapter 11 (for now). Here’s a handy chart for what’s in and what’s not. Caesars Growth Partners (CGP) did not file for bankruptcy.

However, the second-tier creditors believe that Caesars deliberately made a “good” company (CGP) and a “bad” company (CEOC). A federal judge ruling on a lawsuit in New York gave tacit support to the second-tier creditors when she allowed the lawsuit to continue.

Let’s go through some questions and their probable answers:

1. Why did Caesars file for bankruptcy in Chicago? They are a Delaware corporation headquartered in Las Vegas? In bankruptcy, you can file anywhere you have nexus. Caesars has two casinos in Illinois, so the Northern District of Illinois is a possible choice. Presumably, Caesars looked at the likely judges anywhere in the country they could file (including Courts of Appeal–here, the Seventh Circuit Court of Appeals) and liked the Northern District of Illinois over other choices.

2. Then why did the second-tier creditors file in Delaware> Caesars is a Delaware corporation, so a filing in Delaware is also valid. The second-tier creditors probably did the same analysis as Caesars and liked the Delaware judges and the Third Circuit Court of Appeals.

3. There are two bankruptcies: the involuntary petition in Delaware and the voluntary petition in Chicago. Which one is likely to stand? This is the question today, and it’s a pick-em. There is a burden on the second-tier creditors, but the federal court ruling in New York gave them some advantages. Judge Kevin Gross in Delaware will end up making the initial call. That said, if he rules that the case should be in Delaware, I expect that CEOC will file an appeal.

4. How long will the bankruptcy process take? A long time. While CEOC wanted a prepackaged bankruptcy where most everyone agreed, that just isn’t happening. True, 80% of the senior (first-tier) creditors approve of the restructuring. However, no other class of creditors is happy. While it’s theoretically possible that Caesars will exit bankruptcy in 2015, it’s not likely.

5. Who will profit from the bankruptcy? That’s a question with a sure answer: the lawyers.

6. Why aren’t all of Caesars’ hotels included in the bankruptcy? If you look at the list, some of the hotels are merely operated by Caesars and won’t be included in the bankruptcy even if the second-tier debtholders win. However, it is definitely possible that the bankruptcy could expand and take in more of Caesars than just CEOC.

7. Will this impact the World Series of Poker? It’s not likely to have an impact for 2015, but it definitely could sometime in the future. The WSOP is owned by Caesars Interactive Entertainment, Inc.; that’s not currently part of the bankruptcy filing (but it could be if the second-tier wins out).

8. Could some of Caesars’ properties be sold? Definitely. If this does not end up being a prepackaged bankruptcy, then each tier of debtors will propose a plan. One plan could be to auction various properties, so it’s definitely possible.

9. Why did Caesars file bankruptcy? CEOC has been losing money for years and has over $18 billion in debt. The problems stem from the leveraged buyout that Caesars went through several years ago. At that time, the economy was booming and had things continued at the same rate Caesars would have been fine. That didn’t happen.

10. What will happen to the stockholders of CEOC? That’s another question with a certain answer: Their stock is near worthless.

As 2015 progresses we’ll have a better idea how the reorganization of Caesars progresses. It will have a huge impact here in Las Vegas, and it is likely that things will not work exactly how Caesars management want. We’ll get an early read on this when Judge Gross rules on where the bankruptcy actions will take place.