[toc]On July 12, the New Jersey Casino Commission approved Caesars Entertainment’s plan for emerging from Chapter 11 bankruptcy. This decision could pave the way to much-needed overhauls for both Bally’s Atlantic City and Caesars Atlantic City.
Caesars Entertainment Operating Company (CEOC), the business unit which owns the two casinos, filed for Chapter 11 protection in 2015. At the time, the company was operating with $18.4 billion dollars in debt. The commission stated that the new plan reduces that number by $16 billion and over $800 million dollars less in interest payments.
As a result, the company will be able to put those funds towards marketing and refurbishing the stale floors of both New Jersey casinos. Both properties have not had the money for even basic updates. In some cases, slot machines that were decades old were still in play.
Caesars deploys divide-and-conquer strategy
One key component of the plan is splitting CEOC into two companies. One of these companies will manage the casino operations for the casinos.
The other company will manage the real estate assets as a real estate investment trust. A real estate investment trust, or REIT, is a publicly-traded instrument where both institutional and individual investors can participate in the wealth of the company’s investments.
As part of the arrangement, the ownership of this new REIT will be various creditors of the old company. Caesars will retain no interest in this part of the business, but will also drop its debt in the process.
The past may come back to haunt everyone involved
Part of the reason for CEOC’s unwieldy debt was two properties – Planet Hollywood in Las Vegas and Harrah’s New Orleans. CEOC sold both casinos to Caesars Acquisition Company (CAC), another arm of the overall Caesars brand, in an attempt to shed some losing properties.
One requirement of the plan is that Caesars Entertainment and CAC must merge with each other. That aspect of the deal means that the newly-formed REIT will now have to administer the same properties that it had to divest. It will also have to do so without the casino operations to hedge against shortfalls.
In any bankruptcy, those who invested in the company are always at risk of losing their investments. The entire notion of paying interest is based around compensating for that risk.
When a company declares Chapter 11 bankruptcy, the more junior investors usually end up holding the short end of the stick. However, those given equity in the new REIT will have traded one bit of default risk for another.
In the end, the only unaffected entity would be the casino management side of things. As usual, the house always wins.