* Investors ignore litigation risk to absorb juicy
By Natalie Harrison
NEW YORK, April 17 (IFR) - Gaming company Caesars made a big
leap forward in its complex restructuring plan this week after
selling a US$675m high-yield bond issue - the final piece of
financing for a crucial sale of four of its casinos for
The second-lien bonds, along with a US$1.175bn first-lien
loan, part-financed the sale of Bally's, The Cromwell and The
Quad on the Las Vegas strip and Harrah's New Orleans by its
struggling opco, Caesars Entertainment Operating Company (CEOC),
to the new Caesars Growth Property Holdings (CGPH) entity. CGPH
was the issuing entity of the new bonds.
CEOC is reeling under US$21bn of debt following its 2008
leveraged buyout by Apollo and Texas Pacific. After the sale of
the casinos, the entity will have about US$3.2bn in cash.
The sale also satisfies the sponsors' aims of isolating the
group's healthier assets from a potential bankruptcy filing at
the opco, something that is viewed by many market participants
as inevitable at some point over the next two years.
But the asset sales are also at the heart of a potential
fight with CEOC bondholders, who claim the transfers are
fraudulent and that the opco is insolvent.
In making a call to buy the bonds, therefore, investors had
to make a judgement on whether the bondholders have a strong
"People who bought this paper must be out of their minds,"
was the response from one high-yield investor. "We didn't buy it
for a lot of reasons, but mainly we think this transaction could
be subject to legal proceedings that could negatively impact the
The bond deal was the best example yet of "irrational
buying" in the high-yield market, said the investor. "People are
underestimating risks just to get their hands on higher-yielding
paper," he said.
Caesars Entertainment Corp (CEC) said it strongly believed
there was no merit to the bondholders' allegations and would
defend itself vigorously.
One banker not on the deal acknowledged that the bond had
split opinion among potential investors. "Caesars is a very
divisive deal," he said. "The feedback I've got from investors
is that they are in one of two camps: they either support the
restructuring plans, or they don't."
Other areas of buyside concern were centred on the growth
business's access to a so-called Total Rewards loyalty
Total Rewards is owned by CEOC, but will be licensed to CGPH
through a shared services joint venture. It's unlikely that new
owners of CEOC after a bankruptcy would allow that to continue,
said the investor.
The biggest worry, though, is whether the transferred assets
will stay where they are.
"If these assets are clawed back, we do not believe any
amount of additional spread compensate investors
adequately," said CreditSight analysts Chris Snow and James
They nonetheless estimated that CGPH purchased the CEOC
assets at a price they deemed favourable to CGPH, but still
within the boundaries of fair value. And with a yield of 9.375%,
the bond certainly looked very attractive, they added.
The eight-year non-call three second-priority senior secured
notes printed at par in the middle of 9.25%-9.5% price talk,
offering a huge premium even to more highly leveraged names in
Pinnacle Gaming's 7.75% 2022s, for example, are yielding
around 6%, according to Trace.
"Any issuance from the Caesars complex will have a discount
to compensate for at least some of the perceived risk of a CEOC
bankruptcy," said Snow and Dunn.
Citigroup was left lead on the bond, while Credit Suisse,
Deutsche Bank, UBS, JP Morgan, Morgan Stanley, Macquarie and
Nomura were bookrunners.
The most recent asset sales come after those of the Linq
project and the Octavius Tower into Caesars Entertainment Resort
Properties (CERP) and Horseshoe Baltimore and Planet Hollywood
Las Vegas to CGPH. The coveted online gaming assets were also
transferred to CGPH.
The latest financing follows another complex US$2.15bn
two-part bond deal issued last September by CERP, which
refinanced existing CMBS and mezzanine loans.
It comprised an 8% US$1bn first-lien senior secured bond
issue and an 11% US$1.15bn second-lien senior secured note
issue, which have traded well and were quoted at cash prices of
103 and 101.5 on Thursday.
CEOC's first-lien and second-lien bonds are not trading
quite so well, languishing around 85 and 45 cents and signalling
that some form of debt-to-equity swap is on the cards.
Moody's swiftly downgraded CEOC's corporate family rating to
Caa3 after the casino sale announcement last month, and also cut
its first-lien debt to Caa1 and the second-lien debt to Ca.
Fitch, meanwhile, said the transactions were negative for
CEOC creditors because of lower recovery prospects in a default.
The market is now wondering whether CEC will remove its
guarantee on CEOC debt. At the current cash-burn rate, CEOC will
have approximately US$2bn of cash left at the end of this year,
and faces mandatory debt amortisation of about US$1bn in 2015,
according to Moody's.
"CEOC will pursue a debt restructuring in the next year,"
(Reporting by Natalie Harrison, IFR Markets; Editing by Matthew