While we think the idea of a bake sale to reduce Caesars Entertainment‘s $23.5 billion debt is satirical, you never know. It wouldn’t be the most cockamamie idea ever to emerge from Gary Loveman‘s office. We asked one of our sources how Caesars is able to juggle so much debt and the reply, in part, ran as follows:
Each of these financings were able to be accomplished for different reasons, but the key is rooted in CZR’s multi-box structure (OpCo, PropCo, Parent). They can sell assets across the different boxes, swap assets, or even write an asset down to some negligible value and give it away — the valuation needs to be signed off on, but there is great flexibility in determining value. It’s a bit of a shell game.
In the case of Linq, CZR contributed the underlying land which consisted of back parking lots and an alley. They funded the completion of the Octavius Tower and then leased it to OpCo so that they could show some base amount of income. They put together what we would consider to be some aggressive forecast assumptions for the High Roller and sold the original loan.
In the case of the Gansevoort, my unofficial understanding is that they wrote down the value of Bill’s Gamblin Hall to some negligible amount and then segregated the asset and placed $190mm of debt against it. The Bally’s and Quad renovations are being funded with proceeds from the sale of CZR’s Saint Louis (MD Heights) asset.
The recent CMBS –> CERP financing was a masterpiece. A year ago, the CMBS traded in the 60s – it’s safe to say that few believed a refinancing could be possible. Some smart-money hedge funds bought up the debt and committed to roll it into new debt. I’m omitting some key elements as I prefer not to get sued. Essentially, they convinced investors that assets which generate $500mm of EBITDA will generate $650mm of EBITDA — we’ll see.
Caesars, it should be added, is to be lauded for its new emphasis on hiring military veterans. Generally speaking, we treat this class of citizens pretty shabbily and it’s praiseworthy that Caesars is doing something to make amends.
Does any of this sound familiar to you? It is the kind of financial structuring that got our country into the mess that we are still trying to dig out from under. If the fundamentals do not seem to add up; they probably don’t. This is plain and simple a case of musical chairs. Just be sure not to get caught without one!