NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigned a 'CCC/RR2' to $1.75 billion term loan B7 being proposed by Caesars Entertainment Operating Company (CEOC). Fitch believes that the issuance of the B7 term loan and the other contemplated transactions announced by Caesars Entertainment Corp (CEC; Caesars) are negative for most CEOC debt holders.
The transactions benefit CEC's equity in that the parent guarantee release, if it holds, will allow CEC to restructure debt at CEOC without significantly diluting CEC shareholders' interest in CEC's other subsidiaries. The transaction is also favorable for Caesars Growth Partners (CGP), which will swap nearly $430 million of unsecured notes in CEOC for first-lien debt albeit with a longer maturity.
The B7 term loan will mature January 2018 subject to CEOC meeting certain conditions and will be pari passu with CEOC's existing first-lien debt with respect to CEOC collateral. The B7 term loan will benefit from a guarantee from CEC although CEC is seeking to amend some of the guarantee provisions (discussed below).
COLLATERAL DILUTION FOR FIRST-LIEN
If the transactions are executed as contemplated by Caesars the first lien debt will be diluted with about $920 million of incremental first-lien debt. Fitch estimates first-lien leverage increasing to 11.7x from 10.7x on pro forma basis based on Fitch's forecasted 2015 EBITDA assuming Harrah's New Orleans is sold. These ratios assume no debt paydown from CGP asset sale proceeds, which could potentially reduce first-lien leverage closer to 10x depending on the level of paydown.
Unlike the term loan holders, the first-lien note holder will not benefit from the option to consent to the proposed bank amendments in an exchange for debt paydown ($400 million at par) and a fee. However, the first-lien holders may have the option to retain the parent guarantee by swapping their position into the B7 term loans.
The second-lien notes due 2018 ($5.3 billion outstanding), which rely on CEC's guarantee for recovery to a larger extent, will also not benefit from paydown or a fee and further will not have the option to participate in the B7 loan to retain the parent guarantee.
Caesars' announcement states CEC will grant the parent guarantee to the B7 term loan holders and the consenting existing term loan holders and that CEC may grant the parent guarantee on up to $2.9 billion of additional debt. It is unclear how that $2.9 billion will be allocated.
The beneficiaries of the proposed transactions are the notes maturing 2015, which Caesars plans to tender for at a premium to par (CGP owns a large amount of CEOC's 2015 notes). Also the improved liquidity at CEOC and now demonstrated template for dealing with senior unsecured notes held at CGP bodes well for 2016 maturities, which include $960 million of term loans (will receive at least $400 million of the proposed $800 million paydown), $479 million of 10.75% post-LBO notes and $573 million of 6.5% pre-LBO notes ($324 million held at CGP).
B7 AND CONSENT LAUNCH
CEOC launched a $1.75 billion term loan B7 and a consent solicitation to amend the terms of the existing term loans ($4.4 billion outstanding). At the time of the launch, CEOC had $1.7 billion in commitments for the B7 term loan. Proceeds from the loan and cash on hand will be used to repay $829 million of outstanding term loans, $215 million of second-lien notes due 2015 and $792 million of pre-LBO notes due 2015. Of the pre-LBO notes $427 million is owned by CGP, which will reinvest the tender proceeds in B7 term loans.
CEOC will seek consents from the existing term loan holders to amend its 4.75x maintenance covenant; loosen CEOC disclosure requirements; change the terms of the parent guarantee (will guarantee 'collection' and not 'payment') and modify other provisions. Per the announcement, holders of $2.1 billion in term loans already agreed to the amendment and Caesars indicated that it will close the amendment period upon the receipt of consents from the majority of the credit facility. The consenting term loan holders will receive up to $400 million paydown and a fee and will retain the parent guarantee.
Under a guarantee of payment CEC as a parent guarantor would become liable immediately when the guaranteed obligation is not paid when due. The guarantee of collection is more conditional and would require lenders to wait for a judgment to confirm the unfulfilled liability.
FITCH'S VIEW ON GUARANTEE
Caesars is going the route of making CEOC not a wholly-owned subsidiary via equity sale at CEOC level to release the guarantee on all major bonds in its capital structure. CEOC's pre-LBO indentures include a provision that stipulates that the parent guarantee is released if CEOC is no longer wholly-owned by CEC. The post-LBO bonds, which now comprise the bulk of CEOC's debt, include this provision but adjoin it with the word 'and' to two other more onerous provisions, which have not been met. The two provisions include defeasance of debt and disposition of CEOC's assets.
Fitch interprets the 'and' literally and therefore believes that Caesars' position that the guarantee is released based on CEOC ceasing to be wholly-owned can be challenged by the noteholders.
Fitch revised the Recovery Ratings (RRs) on CEOC's first liens debt to 'RR2' (71%-90% recovery) from 'RR3' (51%-70% recovery) and more junior debt to 'RR5' (11%-30% recovery) from 'RR6' (0%-10% recovery) on April 28, 2014. The revision of the RRs on CEOC's debt reflected Fitch's view that there is a better than 50/50 chance that CEOC creditors will realize value from the guarantee in the event there is a restructuring at CEOC.
Realization of this value could be incorporated into negotiated terms of a potential out-of-court debt exchange, or through litigation ultimately via the bankruptcy process. In the meantime, the value of the guarantee becomes diluted since the company is now using the guarantee capacity to support the current transaction.
TRANSACTIONS PRIME CEOC FOR EXCHANGE OFFER
With the additional $920 million of first-lien debt ahead of them and the parent guarantee being in jeopardy, second-lien holders could be more incentivized to enter into a debt-for-equity exchange, possibly for equity in CEOC.
The announcement indicated that CEOC may use its equity for 'liability management and debt reduction initiatives.' Caesars also stated that it may 'seek to expand the group of investors with a goal of increasing the number of holders of CEOC equity in order to help qualify the CEOC equity for listing on a national securities exchange.'
HARRAH'S NEW ORLEANS SALE PENDING REGULATORY APPROVAL
In its announcement, Caesars disclosed that it closed on phase one of the asset sale from CEOC to CGP with just the Las Vegas assets being included in the first phase. The cash consideration for the Las Vegas assets was $1.155 billion, which was funded with cash on hand at CGP and a $700 million term loan that CGP closed on. The $700 million loan will be repaid with $2 billion in Caesars Growth Property Holdings (CGPH) financings that CGPH closed in April once Caesars gets approval from Louisiana regulators on the sale of Harrah's New Orleans, to which Caesars ascribes $660 million in value. Planet Hollywood will remain part of the larger financing.
CGPH's 9.375% second-lien note proceeds are currently in escrow. To avoid an event of default under the 9.375% indenture CGP either needs to close on phase two of the transaction or CGP needs to transfer the assets sold in phase one to another entity. CEC expects to close phase two by second-quarter 2014.
Fitch currently rates CEC entities as follows:
Caesars Entertainment Corp.
--Long-term Issuer Default Rating (IDR) 'CC'.
Caesars Entertainment Operating Co.
--Long-term IDR 'CC';
--Senior secured first-lien revolving credit facility and term loans 'CCC/RR2';
--Senior secured first-lien notes 'CCC/RR2';
--Senior secured second-lien notes 'C/RR5';
--Senior unsecured notes with subsidiary guarantees 'C/RR5';
--Senior unsecured notes without subsidiary guarantees 'C/RR5'.
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'.
Caesars Growth Properties Holdings, LLC
--IDR 'B-'; Outlook Stable;
--Senior secured first-lien credit facility 'BB-/RR1';
--Second-lien notes 'B-/RR4'.
Corner Investment PropCo, LLC
--Long-term IDR 'CCC';
--Senior secured credit facility 'B-/RR2'.
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 Downgrades Caesars OpCo's IDR to 'CC'; Revises Recovery Ratings' (April 28, 2014);
--'U.S. Gaming Recovery Models - Fourth-Quarter 2013' (May 1, 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).