Fitch: Possible Caesars Transaction Unlikely to be Savior
NEW YORK--(BUSINESS WIRE)--News reports that Caesars Entertainment Operating Company (CEOC) recently hired Lazard as an advisor and the active trading in CEOC's 10% second lien notes due 2018 at prices near 50 add to speculation that a meaningful CEOC transaction could be explored in the near term, according to Fitch Ratings. We believe it is unlikely that a near-term transaction will be able to create a sustainable capital structure at CEOC.
“Gaming, Lodging and Restaurant Bankruptcy Enterprise Values and Creditor Recoveries”
One widely discussed potential option is that CEOC may offer holders of CEOC second lien debt and exchange at diminished terms, which would likely be considered a distressed debt exchange (DDE) and tantamount to a default for rating purposes. This could enable CEOC to avoid a more significant restructuring through a bankruptcy reorganization process, at least for the time being. CEOC completed two DDEs when operating under the name Harrah's Operating Co. in 2008 and 2009 in efforts to reduce the high leverage that resulted from a leveraged buyout in January 2008. Fitch classified these exchanges as defaults, but the company has never filed bankruptcy.
However, there are significant challenges in executing a debt exchange targeted at the CEOC second lien. With the second lien debt trading at 50 or better, the economics of an exchange would not improve CEOC's capital structure to a sustainable level. Also, CEC provides CEOC a debt guarantee, which would likely be called on in a restructuring scenario so CEC may seek to strip the guarantee prior to, or in conjunction with a debt exchange, complicating execution. On a standalone basis without any benefit from the guarantee, we estimate no recovery beyond the first-lien at CEOC.
Alternatively, CEOC could explore external or intercompany asset sales in order to improve liquidity at the expense of recurring free cash flow. Asset sales proceeds would be required to pay down first lien debt or reinvested in CEOC within 18 months. We think it is unlikely that any asset sale proceeds would be used to reduce debt. In 2012, CEOC sold a St. Louis property to Penn National and has been reinvesting proceeds. In 2013, CEOC sold certain assets to Caesars Growth Partners (CGP) when CGP was formed.
Asset sales will not improve the long-term viability of CEOC because its gross leverage of 15.0x is well above the multiples of regional gaming assets trading at around 7.0x EBITDA and Las Vegas assets probably valued at between 8.0x-10.0x. To the extent investors view negatively any asset sale at CEOC and this adversely affects second-lien debt prices, the economics of a second lien debt exchange could become more attractive to lenders and increase the likelihood of execution. However, CEOC asset sales could also raise fraudulent conveyance concerns given CEOC's weak financial position.
Fitch's most recent recovery analysis for CEOC anticipates the company, like other gaming companies, would continue as a going concern if it filed bankruptcy. The median enterprise value/forward EBITDA reorganization multiple for 11 gaming company bankruptcies was 7.1x as discussed in our report, "Gaming, Lodging and Restaurant Bankruptcy Enterprise Values and Creditor Recoveries," dated Sept. 4, 2013. The median reorganization multiple is similar to the 7.0x long-term historical transaction multiple observed in the gaming sector.
In our CEOC recovery analysis, Fitch applies multiples ranging from 6.5x to 8.0x to a hypothetical stressed EBITDA for its casino properties depending on the location and profitability. Total CEOC enterprise value is $7.8 billion, implying a 7.3x multiple on wholly owned restricted group stressed EBITDA. This enterprise value results in an estimated recovery value at the high end of the RR3 recovery rating band (near 70%) for first lien creditors and renders poor recoveries for second lien lenders and unsecured note holders. Even with less conservative assumptions, we believe it is difficult to consider the first lien debt fully covered on a standalone asset coverage basis.
Fitch's issuer default ratings on Caesars Entertainment Corp. and CEOC have been 'CCC' since December 2010 and we revised the Rating Outlook to Negative in September 2012.
The interactive recovery analysis on CEOC was published Jan. 29, 2014, U.S. Gaming Recovery Models -- Third-Quarter 2013, and is available on our website www.fitchratings.com.
For additional information on this topic, please refer to our Nov. 18, 2013 report titled, "Caesars Entertainment Corp.: Parent Guarantee and Potential Debt for Equity Exchange Considerations" which is available on our website www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Caesars Entertainment Corp. (Parent Guarantee and Potential Debt for Equity Exchange Considerations)