* Investors ignore litigation risk to absorb juicy second-lien deal
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 US$1.8bn.
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 case.
"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 entity."
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 programme.
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 Dunn.
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 the sector.
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," Moody's said. (Reporting by Natalie Harrison, IFR Markets; Editing by Matthew Davies)