Caesars to Split, Create REITs

Caesars Entertainment is proposing to split its largest operating unit into two entities, with all properties owned by a real-estate investment trust. The only question now is how will the bondholders respond, and which ones get preference.

Company to lay off 1 percent of workforce

Caesars Entertainment Corporation, which has reached a deal with first-lien bondholders to restructure most of a debt load that now exceeds $25 billion in a prearranged January bankruptcy deal, has proposed a split of its most indebted unit, Caesars Entertainment Operating Company, into two entities—a real estate investment trust that would own all the casino hotels and a separate unit that would rent and manage the properties.

It is a model that has worked for Penn National Gaming, which spun off the REIT, Gaming & Leisure Properties. Pinnacle Entertainment and Boyd Gaming are studying it, and it is one that Caesars hopes will add value to its assets, to provide more cash to first-lien bondholders who hold more than $18 billion of the operator’s stifling debt load.

The plan was revealed in a filing last week with the federal Securities and Exchange Commission, in which Caesars revealed it had floated the plan to creditors October 28, causing one of the primary creditors walked out on negotiations and terminate its non-disclosure agreement with the operator. Caesars Entertainment Operating Company owns and operates Caesars Palace on the Las Vegas Strip, two of its remaining Atlantic City properties and other regional casinos.

According to the SEC filing, Caesars is continuing negotiations with its other primary creditors. The operator said in the filing that senior secured credit holders and first-lien bondholders would receive 100 percent and 93.8 percent of what they’re owed, respectively, under the plan. Those next in line would receive a minimal amount unless they vote together to endorse the company’s plan.

Alex Bumazhny of Fitch Ratings told the Associated Press that the proposed REIT split would increase the value of the company’s operating division, as it would boost the value of assets and allow the operator to offer more to creditors.

“Now the only question is who gets what,” he said, referring to all of the company’s bondholders.

Caesars is negotiating with bondholders to restructure most of its debt in a pre-arranged bankruptcy plan the operator hopes to enact in January. The operator has struggled since being taken private in 2008 by Apollo Global Management and TPG Capital, losing money every year.

The operator also said last week that it is commencing job cuts that will trim around 1 percent of its 68,000-strong worldwide work force.

In an email to Bloomberg News, Caesars spokesman Stephen Cohen said the cuts will save as much as $300 million in earnings before interest, taxes, depreciation and amortization next year.

Caesars spokesman Gary Thompson said in a statement that the job cuts will be kept to a minimum.

“As part of the company’s ongoing efforts to ensure operating costs are aligned with the current environment, we are acting to reduce expenses across the company through a variety of initiatives in operations, marketing and corporate expenses,” Thompson said. “Among the initiatives are enterprise-wide job reductions that account for less than 1 percent of the company’s work force.”

The announcement of job cuts came after Caesars said in a separate filing with the Securities and Exchange Commission that its largest division won’t have enough cash to repay debts by the fourth quarter of 2015 if it can’t restructure its obligations through creditor negotiations or bankruptcy.

The operating unit “does not currently expect that its cash flows from operations will be sufficient to repay its indebtedness and will ultimately need to pursue additional debt or equity offerings or seek a refinancing, amendment, private restructuring or a reorganization under Chapter 11 of the Bankruptcy Code,” the company said in the filing.

Investors met the news of the REIT proposal positively. Caesars stock traded as high as $18.69 in after-hours trading the day of the SEC filing, a 30 percent rise from its close at $14.37.