Caesars Entertainment Corp. (NASDAQ: CZR) shares have responded favorably to news that the company presented a plan to creditors that would restructure the company into a real estate investment trust (REIT). Ultimately the plan would convert the casino into a property company that owns its casinos, with another unit in charge of the management.
Caesars is known as one of the highly indebted gaming companies in the industry currently. In theory, this restructuring would allow the casino owner and operator to fulfill its debt-obligations in the form of cash disbursements that REITs are known for.
By trading its equity and disbursing its earnings to its creditors, as well as keeping to the REIT structure, Caesars could stand to give up a fair amount of equity while retaining control of its assets (casinos) as a general partner, with its creditors only having limited partner stakes. How that outcome and the structure ultimately plays out remains to be seen.
Converting to a REIT does not come without risks. That is particularly the case for a company that is so burdened with debt like Caesars. The June 30, 2014, balance sheet showed over $24 billion in long-term debt, and the current market cap of the equity is only about $2.2 billion.
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Following this news on late Wednesday, shares were up almost 7% to $15.34 in the first two hours of trading on Thursday morning.
The consensus analyst price target is $11.25, and the 52-week trading range is $8.51 to $26.74.
The SEC filing’s “Material Terms of the Outdated Proposal” were as follows:
On October 28, 2014, CEOC and CEC made a proposal to certain of the First Lien Creditors, including the Non-Extending Bank Creditor (the “Outdated Proposal”). The Outdated Proposal contained the following material terms:
CEOC would be restructured as a real estate investment trust with a Property Company (“PropCo”) and an Operating Company (“OpCo”). OpCo would lease the properties owned by PropCo and pay rent to PropCo, with CEC providing a limited guarantee of the lease on terms to be determined. The beneficial holders of CEOC’s senior secured credit facilities would receive a 100% recovery in cash and debt. The beneficial holders of CEOC’s first lien bond debt would receive a 93.8% recovery in cash, debt and equity. The beneficial holders of CEOC’s second lien and unsecured bond debt would receive a de minimis amount of equity; provided, however, that if they voted as a class in favor of the restructuring they would receive an additional amount of equity to be determined.
The Outdated Proposal has been superseded by the numerous proposals that have been, and continue to be, transmitted between CEC, CEOC and the other First Lien Creditors. No assurances can be made that an agreement will be reached between CEC, CEOC and the First Lien Creditors on the terms of a restructuring.
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