NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB-/RR1' rating to Caesars Growth Properties Holdings, LLC's (CGPH) proposed senior secured $1.3 billion credit facility and a 'B-/RR4' rating to $675 million in proposed second-lien notes. The credit facility includes a $1.175 billion term loan and a $150 million revolver. In addition, Fitch has assigned a 'B-' to CGPH's Issuer Default Rating (IDR). The Rating Outlook is Stable.
Fitch has also affirmed Corner Investment PropCo, LLC's (Corner; dba The Cromwell) IDR at 'CCC' and Corner's term loan at 'B-/RR2'. The Cromwell will be sold to CGPH by Caesars Entertainment Operating Company, Inc. (CEOC) but will not be part of CGPH's main credit group.
The proceeds from the proposed issuances will be used to acquire Bally's Las Vegas, The Quad and The Cromwell casino assets on the Las Vegas Strip and Harrah's New Orleans from CEOC and to refinance $485 million of debt associated with Planet Hollywood Las Vegas, which is now owned by CGPH's parent Caesars Growth Partners, LLC (CGP) and will join the CGPH credit group upon the refinancing. These assets, with the exception of The Cromwell, will guarantee and secure the credit facility and the notes.
KEY RATING DRIVERS - CGPH
CGPH's relationship with Caesars Entertainment Corp. (CEC; 'CCC' IDR; Negative Outlook) is negatively factored into CGPH's ratings. Adverse outcomes related to access to the Total Rewards program and fraudulent conveyance lawsuits could have material consequences to CGPH creditors. The related risks limit rating upside, but are captured in CGPH's 'B-' IDR. However, CGPH's ratings are not directly linked to the weaker parent company CEC given the expected covenants at CGPH, which will restrict cash being pulled out of the CGPH.
The most notable CEC related risk is the potential that a default at CEOC ('CCC' IDR; Negative Outlook), a subsidiary of CEC, disrupts CGPH's access to CEOC's Total Rewards loyalty program. Total Rewards is owned by CEOC and will be licensed to CGPH through a shared services joint venture (ServiceCo) being contemplated by CEC and Caesars Acquisition Company (CAC; owns 42% of CGP).
CGPH's ratings also take into account that a bankruptcy filing by CEOC may trigger fraudulent conveyance litigation concerning asset sales from CEOC to CGPH although Fitch thinks the risk of the transactions being reversed is low. Fitch believes that the asset sale consideration is within the reasonable range of fair value, which is a primary issue in fraudulent conveyance cases. Fitch estimates the purchase multiple at roughly 9x-10x EBITDA after adjusting for The Quad related capital spending and upside. Further, CEC and CAC received fair value opinions from third-party financial advisors and the asset sales were negotiated by committees of CEC and CAC made up of independent board members of each entity.
Recall that CGPH is a subsidiary of Caesars Growth Partners (CGP), which is 58% owned by CEC (0% voting interest) and 42% by CAC (100% voting interest).
CGPH's ownership by CGP is a slight positive as CGP also owns Caesars' online gaming assets and will have $409 million of cash pro forma for the transactions. CAC could be incentivized to keep CGPH's assets out of default since these assets are strategically important to the rest of CEC's system and there is substantial ownership overlap between CAC and CEC. However, Fitch analyzes CGPH's credit largely on a standalone basis given the uncertainty related to CGP's and CEC's ultimate organizational structures.
CGPH Financial Profile
The 'B-' IDR is supported by CGPH's manageable pro forma debt load; solid liquidity; good free cash flow (FCF) prospects, and a favorable market exposure.
Fitch estimates CGPH's pro forma 2013 year-end gross total leverage excluding Cromwell at approximately 7.1x and 4.5x through the senior secured debt. Fitch projects total leverage to tick up to 7.3x by year-end 2014 as Fitch anticipates CGPH will need to draw on its revolver to fund a portion of the renovation capex at The Quad. Leverage then declines to 6.8x by year-end 2015 and 6.0x by year-end 2016. The improvements in the leverage ratio reflects CGPH's improving EBITDA driven by continued recovery on the Las Vegas Strip, the completion of The Quad renovation and the benefit of the Linq opening this spring.
The Linq is a retail/entertainment corridor abutting The Quad. The construction of the Linq has been disrupting the operations at The Quad and the Linq's opening will drive increased foot traffic near The Quad.
Fitch's EBITDA estimate for 2014, 2015 and 2016 is roughly $260 million, $280 million, and $300 million, respectively. The EBITDA projections are net of approximately $30 million per year of management fees and corporate expenses paid to the ServiceCo.
Discretionary FCF estimated by Fitch is solid at roughly $65 million, $80 million and $100 million in years 2014, 2015, and 2016, respectively. For FCF Fitch estimates annual interest expense and maintenance capex at roughly $145 million and $50 million, respectively. Cash taxes are estimated in the range of $0-$10 million through 2016. Fitch assumes that the $223 million renovation at The Quad will be funded using $100 million in debt proceeds, $60 million draw on the revolver and $63 million from cash flow.
CGP Liquidation and Call Rights Provisions
CEC has call rights to purchase CGP or CAC after three years of incorporation. CEC's call rights are subject to a condition that CEC's net leverage is less than 9x and minimum liquidity is $1 billion. Another condition for exercising the call rights is that there is no event of default that occurred pursuant to CEC's or its subsidiaries' debt documents. Fitch does not believe that CGP being fully acquired by CEC pursuant to the call rights conditions would be a material negative for CGPH creditors since CGPH will retain its covenants (including restricted payment covenants) in such a scenario and CEC would have to be a healthier entity at that point. Fitch expects that there will be a change of control carveout to cover the possible exercise of the call rights by CEC.
There is also a liquidation provision whereby CAC board may elect to liquidate CGP after five years and after eight-and-a-half years there is a forced liquidation (unless otherwise agreed by CEC and CAC). Although CGPH debt documents are not finalized, Fitch expects that the debt documents will require that the liquidation proceeds are first used to repay CGPH debt before CAC and CEC split the proceeds.
CGPH Recovery Analysis
Fitch estimates full recovery for CGPH's senior secured credit facility, equating to a 'RR1' recovery rating or a three notch uplift from the IDR to 'BB-/RR1', and average recovery (31%-50%) for the second-lien notes, equating to a 'RR4' recovery rating with no uplift from the IDR ('B-/RR4'). In the recovery analysis Fitch stresses its 2016 forecasted EBITDAM at 15% and assigns 7.5x EV/EBITDAM multiple to Planet Hollywood, 7x multiple to Bally's and The Quad and 6.5x to Harrah's New Orleans. The EBITDAM stress and the conservative multiples take into account the risk that the properties lose access to the Total Rewards program in an event of a default at CEOC. Other assumptions include full draw on the revolver; administrative expenses equal to 10% of EV and $30 million for corporate expenses. Fitch currently ascribes zero value in its recovery analysis for CGPH's equity in The Cromwell.
RATING SENSITIVITIES - CGPH
CGPH's financial profile, particularly pro forma leverage, is strong for a 'B-' IDR. However, pro forma discretionary FCF is more consistent with a 'B-' IDR although Fitch expects FCF to improve to about $100 million by 2016, the first full year that will benefit from the renovation at The Quad. At that point, CGPH's financial profile as projected by Fitch will be more consistent with a 'B' IDR given CGPH's stand-alone business risk profile and market exposure.
CGPH's ties to CEOC pressures the IDR and may hinder positive rating pressure. A debt restructuring at CEOC that leaves CEOC financially healthier without disrupting CGPH's access to Total Rewards could allow for CGPH's IDR to move higher within the 'B' category to the extent CGPH's leverage remains at around or below 7x and discretionary annual FCF migrates towards $100 million.
There is ample financial cushion at a 'B-' IDR; however, leverage migrating towards 9x and/or FCF declining close to zero could precipitate negative rating action. Fitch would consider negative rating action if the final covenant terms allow greater flexibility to extract cash out of CGPH than Fitch expects; there are no mandatory debt paydown requirements upon the sale of assets in an event of a liquidation and the change of control covenants do not account for the call rights.
Fitch would also consider negative rating action, likely in the form of a Negative Rating Outlook, if a bankruptcy filing by CEOC disrupts CGP's access to Total Rewards.
CEC and its subsidiaries received a letter from a law firm, which claims representing unnamed CEOC second-lien holders and alleges that to date certain assets were improperly transferred. Should a lawsuit be brought for the cause of fraudulent conveyance Fitch expects that CGP will have merits to defend itself against such claim.
CORNER RATING CONSIDERATIONS
Corner is the issuer of a $185 million term loan whose proceeds are being used to renovate and rebrand Bill's Gamblin' Hall & Saloon on the Las Vegas Strip into The Cromwell, a boutique concept casino hotel with day and night clubs. Corner along with the term loan will be transferred from CEOC to CGPH.
The Cromwell will be an unrestricted subsidiary of CGPH; therefore, Fitch will continue to view the Corner credit largely on a standalone basis, which is consistent with its 'CCC' IDR. The transfer to CGPH is credit positive for Corner since CGPH is a healthier entity relative to CEOC. However, Fitch is not linking Cromwell's ratings to CGPH since Fitch does not believe that Cromwell is strategically integral to CGP or CAC given its small size and its one-off business model relative to Caesars' other assets.
The Cromwell's hotel and casino is set to open this April and the attached Drai's clubs will open in May. Fitch will revisit Corner's IDR once The Cromwell opens and begins to ramp up operations.
Fitch assigns the following ratings:
Caesars Growth Properties Holdings, LLC
--IDR 'B-'; Outlook Stable;
--Senior secured first-lien credit facility 'BB-/RR1';
--Second-lien notes 'B-/RR4'.
Fitch affirms the following ratings:
Corner Investment PropCo, LLC
--Long-term IDR at 'CCC';
--Senior secured credit facility at 'B-/RR2'.
Fitch is considering the impact of the transactions on ratings for the rest of the Caesars' entities. See Fitch's comment March 3, 2014 for our initial views following the announcement of the asset sales to CGPH. Fitch rates the other CEC entities as follows:
Caesars Entertainment Corp.
--Long-term IDR 'CCC'; Outlook Negative.
Caesars Entertainment Operating Co.
--Long-term IDR 'CCC'; Outlook Negative;
--Senior secured first-lien revolving credit facility and term loans 'CCC+/RR3';
--Senior secured first-lien notes 'CCC+/RR3';
--Senior secured second-lien notes 'CC/RR6';
--Senior unsecured notes with subsidiary guarantees 'CC/RR6';
--Senior unsecured notes without subsidiary guarantees 'C/RR6'.
Caesars Entertainment Resort Properties, LLC
--IDR 'B-'; Outlook Stable;
--Senior secured first-lien credit facility 'B+/RR2';
--First-lien notes 'B+/RR2';
--Second-lien notes 'CCC/RR6'.
Chester Downs and Marina LLC (and Chester Downs Finance Corp as co-issuer)
--Long-term IDR 'B-'; Outlook Negative;
--Senior secured notes 'BB-/RR1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 19, 2013);
--'Distressed Debt Exchange' (Aug. 2, 2013);
--'Fitch: Caesars CGP Related Transactions Positive for Equity Holders and CERP; Negative for CEOC' (Mar. 3, 2014);
--'U.S. Gaming Recovery Models - Third-Quarter 2013' (Jan. 29, 2014);
--'2014 Outlook: U.S. Gaming (Deleveraging Potential) (Dec. 16, 2013);
--'Caesars Entertainment Corp. (Parent Guarantee and Potential Debt for Equity Exchange Considerations)' (Nov. 18, 2013);
--'Fitch 50 -- Structural Profiles of 50 Leveraged U.S. Credits' (July 11, 2013);
--'U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.' (Sept. 5, 2012).
Applicable Criteria and Related Research:
Distressed Debt Exchange
U.S. Gaming Recovery Models - Third-Quarter 2013
2014 Outlook: U.S. Gaming (Deleveraging Potential)
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Caesars Entertainment Corp. (Parent Guarantee and Potential Debt for Equity Exchange Considerations)
Fitch 50 -- Structural Profiles of 50 Leveraged U.S. Credits
U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.