Sorry, Caesars Entertainment Corp (NASDAQ:CZR). The shell game you’ve played over the course of the past few years with your subsidiary, Caesars Entertainment Operating Company (CEOC), isn’t going to work any longer as a tactic to avoid your legal obligations. You’re potentially on the hook for $11 billion worth of claims being made by bondholders who’ve watched you dismantle the company in an inequitable manner.
That’s the ruling from a U.S. Bankruptcy Court judge, anyway, which sent CZR stock 17% lower as a result.
With the operating company already in the midst of contentious bankruptcy proceedings of its own, it may well pull Caesars Entertainment into bankruptcy with it.
The drama isn’t over yet, however. Caesars Entertainment Operating Company plans to appeal the ruling. And either way, on Tuesday, another group of bondholders will get a chance to file a suit. This one claims Caesars Entertainment reneged on their guarantee of bonds issued by CEOC before it filed for bankruptcy.
Caesars’ Tangled Web
It’s not an easy matter for newcomers to wrap their arms around. Indeed, the saga could be mistaken for the twisted plot line of a John Grisham story. For the unfamiliar, though, it goes something like this:
Caesars Entertainment owns Caesars Entertainment Operating Company (CEOC). For all intents and purposes, the value of CZR should be a reflection of the operation of CEOC. It isn’t, however. CEOC declared bankruptcy early last year. Caesars Entertainment — the holding company — did not.
The parent company teamed up with (mostly for funding) investment funds Apollo Global Management LLC (NYSE:APO) and TPG Capital Management LP. The group, effectively in control of Caesars Entertainment Operating Company, allegedly shed assets in a way that was disadvantageous to CEOC’s lenders. Namely, right before CECO filed for Chapter 11 protection, Caesars Entertainment merged with a property acquisition company outfit Caesars Acquisition Company (NASDAQ:CACQ) — also effectively under the control of CZR — which made CEOC’s assets untouchable to the operating company’s creditors … maybe.
U.S. Bankruptcy Judge Benjamin Goldgar, in Chicago, just said the creditors could indeed file a suit against the parent company, quelling a ruling that had so far staved off such litigation.
And it doesn’t look good for any of the offending parties. A court-appointed examiner has already determined Apollo and TPG Capital along with Caesars Entertainment were attempting what amounts to fraud with the proverbial shell game.
Bottom Line for CZR Stock
Caesars Entertainment’s chief counterargument in its appeal of Goldgar’s decision is that it needs more time. It was going to pony up another $4 billion to get CEOC through its reorganization, but it’s going to take a few more months to sort it all out with creditors. Now without that time to put that $4 billion to use, CEOC could pull Caesars Entertainment into bankruptcy too.
The complaint is too little, too late, though. Even Goldgar commented, “I can’t find that an injunction is likely to enhance the prospects for negotiation.”
It’s at this point in the sordid story, it becomes clear the whole thing is too far gone to salvage. Too much damage has been done, legally, financially and optically. That is to say, Caesars Entertainment looks too guilty to bet on, if not in a courtroom, then at least in the court of public opinion.
CZR isn’t a bargain in the shadow of today’s plunge. It just became untouchable until after the CEOC dust settles. That may not happen until Caesars Entertainment is also bankrupt.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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