TEXT - Fitch rates Caesars Entertainment Operating Co Inc
Feb 4 - Fitch Ratings assigns a 'CCC+/RR3' rating to Caesars Entertainment Operating Company, Inc.'s (OpCo; CEOC) $1.5 billion proposed add-on issuance to the 9% senior secured first-lien notes due 2020. The Rating Outlook is Negative. A full list of ratings follows at the end of this release. In connection with the offering, CEOC is seeking several amendments to its senior credit facilities, which includes permitting the use of proceeds from today's notes issuance, obtaining an additional $100 million of revolving facility commitments due January 28, 2017, increasing accordion capacity by $650 million, and revising the calculation of its primary financial maintenance of 4.75x senior secured net debt/EBITDA. If CEOC obtains the amendments, the proceeds from the add-on issuance will be used to repay outstanding term loans (TLs) and transaction expenses. The TL repayment to consenting lenders will be applied first to outstanding B1, B2 and B3 TLs due 2015, then up to 20% of principal outstanding of B5 and B6 TLs due 2018, with the balance of any additional proceeds to reduce outstanding TLs at CEOC's discretion. The proposed transactions are a slight positive by pushing out 2015 and 2018 maturities to 2020 and by improving liquidity through the additional revolving commitments. However, that is offset by the higher interest costs, which will negatively impact OpCo's near-term cash burn rate. The company's recent refinancing transactions, including the proposed issuance today, have deteriorated the company's free cash flow profile. Fitch estimates that the OpCo will burn $450 - $600 million annually in 2013 - 2014. The B1, B2 and B3 TLs bear interest at roughly 3.2%, while the B5 and B6 bear interest at nearly 4.5% and 5.5%, respectively. As a result, interest costs from the proposed transactions would increase by roughly $70 million. Proforma for recent financings and adjusted for cage cash, CEOC has more than $2 billion of excess cash. The cash on hand should be adequate to fund the CEOC's cash burn projected by Fitch through 2015, make near-term investments in unrestricted subsidiaries (Baltimore and Project Linq), and paydown $125 million in unsecured notes coming due 2013. SENSITIVITY/RATING DRIVERS With Caesars pushing out a bulk of its 2015 maturities, Fitch is now more focused on the company's cash burn rate. Transactions that increase CEOC's cash burn rate materially could lead to a downgrade. As Fitch previously indicated, we are also monitoring developments that may sway the parent's ability or motivation to support CEOC, since the viability of CEOC may depend on such support. The pursuit of a strategic transaction related to a newly created entity, Caesars Growth Venture Partners (CGVP), may pressure ratings as it may reduce the company's willingness to support OpCo debt obligations. Fitch may revise the Rating Outlook back to Stable while affirming the IDR at 'CCC' if the operating trends pick up stronger 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. RECOVERY RATINGS Today's proposed issuance is not material to the RR3 rating from a recovery analysis standpoint. In December 2012, Fitch downgraded CEOC's first-lien debt to 'CCC+/RR3' from 'B-/RR2' when it last issued $750 million of first-lien notes due to reduced recovery prospects from that issuance, and the longer-term trend of executing several transactions that have negatively impacted first-lien recovery prospects. The 'CCC+/RR3' rating assigned to the proposed notes reflects estimated recovery rate for first-lien debt in the 51%-70% range. Fitch's estimated recovery for CEOC's first lien debt is at the high end of the stated range, so there is 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). 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. Fitch ratings are 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 at 'C/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'. Caesars Linq, LLC & Caesars Octavius, LLC --Long-term IDR 'CCC'; Outlook Negative; --Senior secured credit facility 'CCC+/RR3'; Corner Investment PropCo, LLC --Long-term IDR 'CCC'; Outlook Stable; --Senior secured credit facility 'B-/RR2'.
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