Sunday, September 22, 2013

The Deal: Caesars Launches Massive Refinancing

NEW YORK (The Deal) -- Caesars Entertainment (CZR) has launched an initiative to refinance a total of $4.85 billion in debt, giving bondholders in its property unit a better-than-expected deal.

Under the refinancing plan, holders of $4.4 billion in commercial mortgage-backed securities (CMBS) will receive $0.99 on the dollar plus accrued and unpaid interest while holders of $450 million in mezzanine debt will receive $0.90 on the dollar plus accrued and unpaid interest, according to a Sept. 17 statement.

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Private equity-backed Caesars is sweetening the deal for new debt holders by throwing in its Octavius Tower and Linq assets--Las Vegas properties from its Caesars Operating Co. unit--as security on their loans.

To fund the refinancing, the Las Vegas-based casino and hotel operator plans to issue a $3 billion term loan, a $269.5 million revolving credit facility, $500 million in first-lien notes, and $1.35 billion in second-lien notes. Caesars hasn't released information about the pricing of these new loans, but a bondholder in the property company said in a Sept. 18 interview that the company plans to price the first-lien loan at Libor plus 550 basis points with a 1% floor and a 99 offer price. The casino operator hopes to price its $500 million in first-lien notes at 7% and its $1.35 billion in second-lien notes at 9.5% to 10%, the source added. He thinks a 7% coupon for the first liens makes sense, but 9.5% to 10% seems too low for the second-lien notes. He believes 11% would be more reasonable, although the company may be able to swing a lower coupon price due to investors' hunger for yield. The main point of this refinancing isn't to reduce Caesars' staggering debt load of $23.5 billion, as the discounts on the buyback are mild. The primary focus would be the elimination of worrisome debt maturities in 2015. This refi would give Caesars more time to work out a comprehensive restructuring to tackle its debt problem. Now that the property company refinancing is underway, "All eyes are on the disaster at OpCo [Caesars Operating Co.]," the bondholder said.

He believes Caesars needs to shed all but the bank debt in its OpCo unit.

The bondholder expects that Caesars will do what it can to reduce debt outside of court, but he thinks a Chapter 11 bankruptcy--ideally a prepackaged agreement--is inevitable.

"It's just a lot of debt," he said, explaining, "You need to run this through a Chapter 11 process just to clean up the holdouts."

Disputes between different classes of bondholders with disparate recovery expectations are likely to scuttle the chances of an out-of-court solution, the bondholder explained. Beyond the usual creditor class disputes, Caesars also has a problematic contingent of basis traders that have no incentive to take a haircut, the source noted. These basis traders have hedged their bets by holding both second-lien debt and credit default swaps that insure them against the non-payment of their second-lien debt. Essentially, they are arbitraging what they believe is a mispricing of similar securities by taking opposing short and long positions with the expectation that their values will converge. For now, Caesars has breathing room until some of its unsecured debt matures in 2015. The company may want to restructure that debt or even work out a comprehensive restructuring before then in order to avoid paying par for the unsecured notes. The bondholder believes Caesars and its private equity owners, Apollo Global Management and TPG Capital, will want to take care of one particular detail before undertaking a bankruptcy filing--the parent company's guarantees on the operating company's shaky debt. Caesars hived off some of its most attractive assets into a new unit, Caesars Growth Properties, in a move to protect its crown jewels. That protection, however, depends on the health of the ultimate parent company, Caesars Entertainment Corp. The parent's health is threatened because it still guarantees the operating company's debt. "You've created a good amount of value with [Caesars Growth Partners] and PropCo [the property company]. Now how do you keep the value in the parent from getting sucked down into the OpCo [Caesars Operating Co.]?" the bondholder asked. "You get rid of the parent guarantees."

Caesars could accomplish this by buying back its notes due in 2015, 2016, and 2017. If one type of operating company creditor loses its parent guarantee, everyone loses their parent guarantees.

Alternatively, Caesars could get a waiver on the parent guarantee on its bank debt, or buy back the bank debt. The company would certainly have to give those parties an attractive deal, but if one acquiesced, the other would lose its parent guarantee. Then Caesars could slide into Chapter 11 with its Caesars Growth Partners assets and property company assets cordoned off more securely.

Fitch Ratings Inc. said on Sept. 18 that it expects to give the new first-lien debt issued at Caesars Entertainment Resort Properties LLC--the $3 billion term loan, the $269.5 million revolver, and the $500 million in notes--a rating of B-, while the $1.35 billion in second-lien notes are expected to score a CCC.

The ratings agency explained that its ratings on Caesars Entertainment Resorts' debt are under pressure due to concerns about a default at the Caesars Operating Co. unit. Fitch said it would examine the restricted payment covenants when the property unit releases its new credit agreement, in order to see what protections the agreement provides in the case of an operating company default. Fitch also affirmed its CCC ratings on parent company Caesars Entertainment Corp. and its Caesars Operating Co. unit. Apollo Global Management and TPG Capital hold a 70% stake in Caesars from a 2008 buyout that clocked in at a whopping $30.7 billion with $12.4 billion in debt. Caesars' common stock is listed on Nasdaq under the symbol CZR. Its shares dropped nearly 10% from its pre-refinancing-announcement closing price of $25.93 on Sept. 17 to a closing price $23.39 on Wednesday. Written by Lisa Allen

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