WEEKLY FEATURE: Caesars Downgrade

A group of Caesars Entertainment Corp. lenders and bondholders is taking a closer look at the company’s recent strategy of creating subsidiaries in an effort to manage its debt. Some fear that breaking the company, led by Chairman & CEO Gary Loveman (l.), into units could leave some parts vulnerable to bankruptcy.

S&P downgrades outlook to “negative”

Caesars Entertainment has taken extraordinary measures to restructure its debt-burdened company and lighten its long-term obligations. But some analysts are worried about the practice, in which the parent company has spun off a number of casinos and other businesses into subsidiaries.

Investors and bondholders also are expressing concern about the approach. Some fear it means Caesars is trying to shield its most valuable assets, and may allow less important ones to go bankrupt.Caesars defended itself in a filing with the U.S. Securities and Exchange Commission, and said undoing the strategy “could trigger a default” of its affiliate’s debt.

“These consequences could have a material adverse effect on Caesars Entertainment’s business, financial condition, results of operations and prospects,” the company said in the filing. Caesars carries a gaming industry-high $23 billion in long-term debt.

Caesars Entertainment owns 58 percent of Caesars Growth Partners, which was established to help lighten the company’s balance sheet. Caesars Growth Partners now owns Planet Hollywood Resort, the unfinished Horseshoe Baltimore, a hotel tower at Caesars Palace, and the company’s interactive gaming business, which includes its online gaming operations in Nevada and New Jersey and the World Series of Poker.

Caesars wants to add four more properties to the unit, according to the Las Vegas Review-Journal: Bally’s Las Vegas, the Quad, the Cromwell and Harrah’s New Orleans. It would sell the properties to Caesars Growth Partners for $2.2 billion transaction, and use proceeds from the sale to pay down debt.

In order to complete the sale, Caesars Growth Partners is seeking loans of $1.3 billion. Caesars Entertainment is also peddling 7 million additional shares of stock to raise an additional $148 million.

Amid the shuffling of assets,Caesars says it has heard from a law firm “claiming to act on behalf of unnamed parties” who say they are lenders and bondholders. Those unnamed parties want to undo the spin-offs, and claim Caesars has abrogated its fiduciary responsibilities.The company said, “there is no merit” to the allegations.

The website CalvinAyre.com called Caesars’ approach an “asset shell game,” and the prelude to “an inevitable bankruptcy filing, which would leave note-holders unable to make claims on the portions of Caesars that actually make money.”

New Albion Partners analyst Anish Vora told the website Caesars investors are “getting sliced and diced right now” and said a judge might deem the spin-offs “illegal transfers of assets.”

And last week, Standard & Poor’s lowered its corporate credit ratings on Caesars Entertainment to “negative.” S&P credit analyst Melissa Long said she doesn’t expect Caesars will have “sufficient liquidity” to meet its debt obligations of roughly $3.5 billion that mature in 2015.

“The downgrade reflects our expectation that Caesars’ capital structure is unsustainable,” Long said. “The amount of cash the company will burn in 2014 and 2015 creates conditions under which we believe a restructuring of some form is increasingly likely over the near term, absent an unanticipated significantly favorable change in operating performance.”

Despite the S&P’s skepticism, shares of Caesars closed up 52 cents on the day of the downgrade, reported the Review-Journal.