Will Caesars Entertainment Survive the Damning Examiner’s Report?

Embattled casino operator Caesars Entertainment Corp. (NYSE: CZR) was dealt another blow Tuesday when a nonbinding examiner’s report determined that $3.6 billion to $5.1 billion worth of assets were unfairly stripped from bankrupt unit Caesars Entertainment Operating Co. (CEOC) before bankruptcy was declared. Essentially, the report recommends that damages be paid to creditors who were stripped of assets by the Caesars parent company during an asset shuffle.

Though the report is not a court order, it will be used as a bargaining chip to extract more concessions out of Caesars in any eventual settlement. The question is what Caesars can afford to give, and if compelled to hand over the money, will the casino be able to survive?

Despite shedding over $10 billion in debt in the CEOC restructuring, the parent company is still saddled with $7.1 billion in additional debt, of which $4.2 billion is exposed to interest rate fluctuations. This makes the company leveraged 7:1 even now. Add $5 billion more to that and they’re leveraged 12:1, a similarly unsustainable position that the parent company was in before the spin-off and bankruptcy.

Caesars admits openly in its latest annual report that it can’t afford this, and even raises it as a going concern issue in its filings. From Caesars:

If CEC became obligated to pay amounts owed on CEOC’s indebtedness … bankruptcy … would be necessary due to the limited resources available at CEC to resolve such matters … we have concluded that these matters raise substantial doubt about the Company’s ability to continue as a going concern.

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The original figure of concern in this case is $7 billion in loan guarantees that were denied to Caesars’ junior creditors, who were going to get nothing if Caesars got its way. This new report now recommends they get half or more of what they are owed, which Caesars still can’t afford.

The next step in this saga will be in May, when an earlier stay of the junior creditor lawsuit will expire and the suit will be allowed to proceed. Until that time, Caesars will continue to languish in bankruptcy purgatory, which probably won’t do well for its stock price. The only good news for the casino giant is that the parties finally agreed on a mediator last month in retired judge Joseph Farnan, indicating that some form of compromise that keeps Caesars viable while appeasing creditors is still possible. It all depends on whether disgruntled creditors are determined to sink the parent company for their share, or if they are willing to take less and allow it to survive.