Caesars bondholders feel the pressure

Fri May 9, 2014 1:32pm EDT

NEW YORK, May 9 (IFR/RLPC) - With debt-laden gaming giant Caesars widely expected to undergo restructuring, current bondholders may see their future negotiating power being seriously weakened.

The corporate parent's guarantee behind bonds issued by the opco, Caesars Entertainment Operating Company (CEOC), is expected to be removed under a credit agreement amendment.

Analysts say this would significantly weaken the position of current bondholders when CEOC, which is groaning under some US$18bn in debt, heads to restructuring.

"If the opco is restructured, there would have to be an agreement with the bondholders to do so," Andrey Kuznetsov, a credit analyst at Hermes, told IFR.

"By removing the guarantee, bondholders will not only have less leverage at the negotiating table, will also probably get a lower recovery on their bonds."

Private equity firms Apollo and TPG acquired Caesars in a 2008 leveraged buyout, leaving the company with a mountain of debt - and more is on the way.

CEOC plans to raise an additional US$1.75bn in a new first-lien term loan, which will repay more than US$1bn of 2015 bond maturities if investors tender the debt, as well as some existing bank loans.

In addition to the proceeds from a sale of a handful of properties, the funds will enhance the company's liquidity.

Lead bank Credit Suisse held a lender call on Wednesday for the first-lien term loan B, and commitments were due on Friday after the deadline was accelerated following an oversubscription. According to CreditSights, the company indicated it had already received "orders" for US$1.7bn.

The loan, maturing on March 1 2017 with a springing maturity, is guided at Libor plus 950bp, with a 1% Libor floor, and a 98 original issue discount. Call protection is non-call for six months, then 101 for the next six months, then par.

Despite the new financing, Moody's believes that signs point to a "broader restructuring" of CEOC.

"The planned transaction ... does little to alleviate our continuing view that the company will pursue a more comprehensive restructure of CEOC that will involve impairment to creditors," said Moody's analyst Peggy Holloway.

"We still do not expect the company will be able to repay or refinance its 2016 debt maturities in a manner that will keep existing creditors whole."

BONDS DOWN

CEOC's 10% December 2018 second-lien bonds have been pricing in significant losses for months, falling to a cash price of 40 cents on the dollar this week before recovering to around 45.

Its 8.5% February 2020 first-lien bonds, however, had been considered pretty safe - until the company announced this week it would try to remove the parent's guarantee.

The 2020s quickly dropped seven points to 78.5 bid.

"The sharper drop in the first-lien bonds suggests that those bondholders did not expect to be affected in a significant way," said Kuznetsov from Hermes.

The company is also raising a new loan at the level of Caesars Growth Partners (CGP), said sources.

The US$700m first-lien term loan will mature in one year, with potential for a one-year extension. Proceeds will back CGP's recently completed acquisitions of Bally's Las Vegas, The Cromwell and The Quad Resort & Casino from CEOC.

The company said this week that it had sold 5% of CEOC equity for US$6.125m - a move intended to release CEC from guaranteeing the outstanding bonds.

"The company appears to have threaded the needle to both enhance the position of Caesars' equity and to diminish the position of first and second-lien bondholders," said Chris Snow and James Dunn, analysts at CreditSights.

"The sponsors have effectively increased the size of both the carrot and the stick as it will seek to address [ie, coerce] the capital structure in the future."

The stick, of course, is bankruptcy.

Before that, however, a legal fight with bondholders could be on the cards as sponsors isolate the group's healthier assets from any potential bankruptcy filing at the opco.

CreditSights said the next step was likely to be a distressed debt exchange targeting the underwater second-lien bonds. The problem there, however, is that the current price of those bonds does not make such an exchange tenable.

"We believe the 2018 second-liens and the 2020 first-liens are pricing two vastly different scenarios," the research company said.

"The second-liens are over-confident in their blocking position in a restructuring and in the potential value of the parent guarantee. The first-liens are overreacting to expectations of more dire outcomes, such as further collateral asset sales." (Reporting by Natalie Harrison; IFR; and Natalie Wright; RLPC; Editing by Marc Carnegie and Matthew Davies)

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