Loveman’s credit capers; Green shoots in flyover country

Reorganization of Caesars Entertainment promises to continue to provide drama. UMB Bank threw red meat on the barbeque with a lawsuit that charged Apollo Management and Texas Pacific Group with having “thoroughly ransacked CEOC in a sweeping and now transparent plan to take CEOC’s prime assets for themselves and leave its liabilities and creditors behind … This is a case of unimaginably brazen corporate looting and abuse perpetrated by irreparably conflicted management.” Top management is accused of having “stripped CEOC of eight of its most valuable hotel, casino and entertainment properties — including a six-property stronghold in the heart of the Las Vegas Strip — on terms that were patently unreasonable in order to enrich themselves at the expense of CEOC’s creditors … for staggeringly inadequate consideration.”

Given how the spinoff of Caesars Growth Properties from Caesars Entertainment Operating Co. (Little Caesar and Big Caesar) was conducted, there’s a lot to what UMB says. Several of the prize assets are now sequestered safely in Little Caesar, whether we’re talking about the World Series of Poker or Total Rewards. However, with most senior bondholders and term-loan creditors lining up behind Caesars’ REIT-structured reorganization plan, can UMB hope realistically to throw a monkey wrench into the works? “In the case of Caesars, however, there are bitter divisions within the same class of creditors, making it far more difficult to reach an orderly restructuring agreement,” writes the Financial Times. Those creditors with credit insurance, the magazine adds, could ride out any bankruptcy filing while those who sold it have little stomach for a court battle. “Some people involved say that at least a few creditors who supported this week’s complaint have credit default swap protection that will expire if there is no default event soon.”

However the UMB suit makes a long list of demands, perhaps impractical ones, ranging from receivership, reinstitution of guarantees and an unraveling of the Big Caesar/Little Caesar relationship. The lawsuit’s language is also entertainingly florid, perhaps to put a convincing flourish on a long-shot case: “CEOC’s slavish obedience to the self-serving whims of its parent, [Caesars Entertainment Corp.], and the sponsors is indefensible. Every day defendants maintain control over CEOC is another opportunity to strip out the last remaining value from CEOC’s decaying carcass while simultaneously running the clock on the preference and fraudulent transfer look-back periods in advance of CEOC’s inevitable collapse into bankruptcy.”

Caesars’ handling of its overexposure in Atlantic City has found its way into the controversy. As the Philadelphia Inquirer put it, bondholders are concerned with Bally’s Atlantic City, Caesars Atlantic City and the defunct Showboat having “landed in the dumping ground of properties with uncertain futures called Caesars Entertainment Operating Co.” But Harrah’s Resort, meanwhile, is safely ensconced in Caesars Entertainment Resort Properties (brother of Little Caesar), “expected to be profitable enough to make its interest payments this year and next year,” according to the New Jersey Division of Gaming Enforcement. Buried deep in the story is the intriguing note that Big Caesar plans to cover $1.605 billion in shortfalls in 2014 and 2015 from asset sales. No specific properties were identified as having been moved to the auction block.

Caesars is meanwhile trying to palliate junior creditors who feel “a restructuring plan with senior creditors that could leave them with table scraps.” As a REIT, Big Caesar gets to have its cake (increased cash flow to senior creditors) and have it too, sheltering its assets from bankruptcy forfeiture. Heck, even if it had to give up some of its casinos, the creditors would probably have to job Caesars right back in to run them. Banks and bond houses aren’t cut out to be in the casino business. In the meantime, Caesars continues to outspend MGM Resorts International and Las Vegas Sands on construction projects.

As long as the odds for the dissident creditors are, they have to fling this Hail Mary pass or be left on the hook for much of Caesars debt. As bond analyst Barbara Cappaert noted, by getting Caesars around a $260 million interest payment, the REIT split “would come on the backs of more junior creditors.” “Such a maneuver, if executed, can increase CEOC’s value by an estimated 13%,” Fitch Ratings analyst Michael Paladino added. In other words, Gary Loveman & Co. get to keep the gold mine and junior creditors must settle for the shaft.

* For a company with deep roots in regional gaming, a strong October — the strongest in a while — must be reassuring to Caesars, as well as to its brethren. Boyd Gaming, Pinnacle Entertainment, Penn National Gaming and Isle of Capri Casinos all outperformed the S&P Index by a healthy measure — enough for Boyd to finally get a little love from analysts. Low gas prices are seen as a contributory factor, although some analysts, like Macquarie Securities‘ Chad Beynon think the Street isn’t buying into the recovery yet: “On the back of a ‘Goldilocks’ economy and gross gaming revenue that is finally in the black, we are positively adjusting our outlook … We still believe many investors are not yet buying the recovery, even now, with what we believe are three-to-four months of proof.” Enormous leaps in October revenue in Ohio and Maryland are chalked up to significant new product.

Stern Agee analyst David Bain countered, “we struggle for empirical evidence of meaningful or sustainable market improvements.” He thinks Wall Street is putting too little weight upon the impact Golden Nugget Lake Charles will have on Pinnacle Entertainment’s L’Auberge du Lac (above) when the former opens next week.