TEXT-Fitch rates Caesars' proposed notes 'CCC+/RR3'
Dec 5 - Fitch Ratings assigns a 'CCC+/RR3' rating to Caesars Entertainment Operating Company, Inc.'s (OpCo; CEOC) $300 million proposed add-on issuance to the 9% senior secured notes due 2020. Fitch also downgrades OpCo's senior secured credit facility and outstanding senior secured notes to 'CCC+/RR3' from 'B-/RR2. Fitch also affirms the Issuer Default Ratings (IDRs) of CEOC and related issuers (full list of rating actions follows at the end of this release). The Rating Outlook is Negative. About half of the proceeds from the add-on issuance will be used to repay the B1-B3 term loans outstanding with the balance being used for general corporate purposes. Pro forma for this transaction there will be approximately $875 million remaining in term loans B1-B3, which mature in 2014. The proposed transaction is seen as a slight positive in terms of reducing the probability of OpCo's default by further pushing out its 2014 maturity wall and by bolstering available liquidity. That is somewhat offset by the higher interest costs, which will negatively impact OpCo's near-term cash burn rate. OpCo's excess cash is at approximately $1.7 billion pro forma for this transaction plus the Harrah's St. Louis sale and the conversions of Caesars' revolver capacity into term loan B6 executed in the fourth quarter The cash on hand should be adequate to fund the OpCo's cash burn projected by Fitch through 2014, make near-term investments in unrestricted subsidiaries (Baltimore and Project Linq), and paydown $125 million in unsecured notes coming due 2013. However, as reflected in the downgrade of the first-lien debt, the transaction is a negative for creditors' recovery prospects as it adds at least $150 million in incremental first-lien debt to OpCo's capital structure. The first-lien debt rating has been on the cusp of RR2 and RR3 for some time and Fitch previously indicated that additional first lien debt and/or other transactions that reduce first-lien recovery prospects could result in a downgrade. Today's downgrade of the first-lien debt reflects the longer-term trend in which many of the company's transactions have negatively impacted first-lien recovery prospects, as well as the possibility that trend may continue going forward. Fitch maintained an 'RR2' rating on the first-lien debt while recovery prospects were weakening due to various transactions, but the current 'RR3' rating now provides ample cushion for any further recovery deterioration. With the proposed issuance roughly $800 million in incremental first-lien debt will be issued or converted since the beginning of 2012 although approximately $600 million in revolver capacity reductions accompanying the conversions during the same period potentially help to offset some of the recovery dilution. The recapitalization of Chester Downs in February 2012, the sale of Harrah's St. Louis to Penn National, and the transfer of Bill's Gamblin' Hall & Saloon to a separate restricted group all hurt first-lien recovery prospects. Last year, the Project Linq/Octavius Tower assets were carved out of the OpCo. The 'CCC+/RR3' rating assigned to the proposed notes reflects estimated recovery rate for first-lien debt in the 50%-71% range. Fitch's estimated recovery for CEOC's first lien debt is at the high end of the stated range therefore there is now considerable cushion at the 'RR3' Recovery Rating for the first-lien debt. Detailed recovery analysis using data through June 30, 2012 for Caesars is available on www.fitchratings.com (see links below) and Fitch plans to update the recovery model for the third-quarter and the proposed transaction shortly. OpCo's 'CCC' IDR and Negative Outlook reflect CEOC's weak FCF profile and a real possibility of a liquidity shortfall around 2015. Fitch's rating commentary and a detailed report on Caesars, both dated Sept. 5, 2012 provide a more extensive discussion about the Caesars overall credit profile. What Could Trigger a Rating Action With Caesars pushing out a bulk of its 2015 maturities, Fitch is now more focused on the company's cash burn rate, especially as it relates to the net senior secured leverage covenant. Fitch is also monitoring developments that may sway the parent's ability or motivation to support the OpCo. Further material monetization or dilution of the Interactive business (outside the OpCo) may lead to a downgrade of the OpCo. Caesars recently sold a portion of Interactive to Rock Gaming LLC for about $80 million in proceeds. Fitch may revise the Rating Outlook back to Stable while affirming the IDR at 'CCC' if the operating trends pick up more strongly than expected, improving prospects for a sustainable FCF profile by a 2015 time frame. The Las Vegas Strip (27% of OpCo's LTM EBITDA) is Caesars' best bet for leveraging any improvement in the macroeconomic environment. Fitch has taken the following rating actions: Caesars Entertainment Corp. --Long-term IDR affirmed at 'CCC'; Outlook Negative. Caesars Entertainment Operating Co. --Long-term IDR affirmed at 'CCC'; Outlook Negative; --Senior secured first-lien revolving credit facility and term loans downgraded to 'CCC+/RR3' from 'B-/RR2'; --Senior secured first-lien notes downgraded to 'CCC+/RR3' from 'B-/RR2'; --Senior secured second-lien notes affirmed at 'CC/RR6'; --Senior unsecured notes with subsidiary guarantees affirmed at 'CC/RR6'; --Senior unsecured notes without subsidiary guarantees affirmed at 'C/RR6'. Chester Downs and Marina LLC (and Chester Downs Finance Corp as co-issuer) --Long-term IDR affirmed at 'B-'; Outlook Negative; --Senior secured notes affirmed at 'BB-/RR1'. Caesars Linq, LLC & Caesars Octavius, LLC --Long-term IDR affirmed at 'CCC'; Outlook Negative; --Senior secured credit facility affirmed at 'CCC+/RR3'; Corner Investment PropCo, LLC --Long-term IDR affirmed at 'CCC'; Outlook Stable; --Senior secured credit facility affirmed at 'B-/RR2'. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012); --'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Aug. 14, 2012); --'Distressed Debt Exchange' (Aug. 8, 2012); --'U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.' (Sept. 5, 2012); --'Fitch Affirms Caesars' OpCo at 'CCC' & Chester at 'B-'; Revises Outlook to Negative' (Sept. 5, 2012); --'U.S. Gaming Recovery Analyses -- Second-Quarter 2012' (Sept. 12, 2012); --'2012 Outlook: Gaming -- Market Exposure the Differentiating Factor' (Dec. 13, 2011). Applicable Criteria and Related Research: Corporate Rating Methodology Parent and Subsidiary Rating Linkage Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers Distressed Debt Exchange U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp. U.S. Gaming Recovery Models -- Second Quarter 2012 2012 Outlook: Gaming -- Market Exposure the Differentiating Factor
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