Fitch Rates Caesars' PropCo Sr Debt 'B+/RR2' & 2nd Liens 'CCC/RR6'; Affirms
CEOC's IDR at 'CCC'
NEW YORK -- September 18, 2013
Fitch Ratings expects to assign a 'B+/RR2' rating to Caesars Entertainment
Resort Properties, LLC's (CERP) proposed $3.27 billion senior secured
first-lien credit facility and $500 million first-lien notes and a 'CCC/RR6'
rating to CERP's proposed $1.35 billion in second-lien notes. Fitch has
assigned an initial 'B-' Issuer Default Rating (IDR) to CERP. Fitch has also
affirmed the IDRs of Caesars Entertainment Corp. (CEC; Caesars, the parent)
and Caesars Entertainment Operating Company (CEOC) at 'CCC' and affirms all
other related ratings. A full list of rating actions follows at the end of
CERP's credit facility will consist of a $3 billion term loan and a $269.5
million revolver. The facility, the first-lien notes and the second-lien notes
will be guaranteed and secured by Rio, Flamingo, Paris and Harrah's casino
resorts in Las Vegas, Harrah's in Laughlin, NV, and Harrah's in Atlantic City,
NJ as well as the Octavius Tower and Project Linq assets (together
Linq/Octavius). Linq/Octavius will be transferred from CEOC by Caesars.
The Octavius Tower includes 602 rooms, 60 suites and six luxury villas and is
part of the Caesars Palace complex, which is part of CEOC. Project Linq
includes a 550-foot observation wheel (High Roller), over 260,000 square feet
of retail space (some will be leased by other CERP entities) and a redeveloped
O'Sheas casino. CEOC will lease Octavius Tower and the O'Sheas casino from
CERP for $35 million and $15 million, respectively. Octavius Tower opened in
January 2012 and Project Linq will open in phases from late 2013 to early
CERP will use the proceeds from the proposed financing to repurchase
approximately $4.4 billion in outstanding debt at the PropCo and refinance the
$450 million term loan used to fund Linq/Octavius. Caesars will pay 99% of par
for $3.67 billion in outstanding PropCo mortgage notes and 90% of par for $719
million in outstanding mezzanine notes. The repurchases are conditioned upon
the acceptance by lenders holding at least 65% of the outstanding aggregate
principal amount of the mortgage loans (63% accepted as of Sept. 17, 2013) and
85% of the outstanding aggregate principal amount of the mezzanine loans (84%
CERP RATING DRIVERS
CERP's 'B-' IDR reflects Fitch's expectation that pro forma for the
transactions and the opening of the Linq components CERP will have sustainable
leverage and FCF profiles. The IDR also factors in CERP's relationship with
CEC and CEOC. CERP's positive FCF will allow for modest deleveraging over the
near-to-medium term. Liquidity will be solid with a $269.5 million undrawn
revolver and no maturities until 2020, when the first-lien debt matures. The
second-lien notes will mature 2021.
In its base case, Fitch projects CERP's leverage at year-end 2014 and FCF for
2014 at 8.9 times (x) and approximately $75 million, respectively. Fitch's
forecasted property EBITDA for 2014 of $627 million includes the following
--$440 million of EBITDA generated by the existing PropCo Las Vegas casinos
(70% of EBITDA);
--$76 million generated by Harrah's Atlantic City (12% of EBITDA);
--$42 million generated by Harrah's Laughlin (7% of EBITDA); and
--$69 million generated by Linq/Octavius, which includes $50 million in lease
payments from CEOC and $19 million capturing three-quarters of the High Roller
and retail operations (together 11% of EBITDA).
Fitch's FCF forecast for 2014 takes into account approximately $90 million of
corporate expenses, $365 million of interest expense and $100 million in
capital expenditures. The corporate expense assumption takes into account a
management fee structure similar to the one that is in place at the PropCo;
however, terms of the management fee, if there will be one, are not yet
determined. The capital expenditures include the final costs associated with
Linq and should moderate to around $60 million in the outer years. Leverage
and FCF under Fitch's base case forecast improves in 2016 to 8.3x and $160
million, respectively. The improvements reflect annual EBITDA growth of about
2% (Las Vegas growth and ramp-up of Linq offset by Atlantic City weakness),
decline in annual capital expenditures and a modest reduction in interest
CERP'S RELATIONSHIP WITH CEC AND CEOC
CERP's 'B-' IDR is supported by Fitch's expectations that the restricted
payment covenants in CERP's credit agreement will be restrictive and would
guard CERP creditors against attempts by CEC to extract value out of CERP and
against a potential default at CEOC. Fitch may revisit the ratings if the
restricted payment covenants are looser than Fitch's current expectations.
Regardless of the restrictive payment covenants in place, CERP's ownership by
CEC, which guarantees the debt at the highly leveraged and FCF-negative CEOC,
is a key credit risk and will pressure CERP's IDR. Positive rating pressure on
CERP will be constrained by CEC's ownership and an upgrade is unlikely while
there is a heightened probability of default at CEOC.
There is also uncertainty with respect to the Linq/Octavius lease payments
(about 8% of CERP's EBITDA) from CEOC to CERP if CEOC defaults. Fitch believes
that in an event CEOC defaults the leases would be affirmed given their
strategic importance to CEOC, but there is good likelihood that the lease
terms will be renegotiated at lesser terms. However, if the leases were
rejected, CERP could either monetize the assets or operate the assets itself,
albeit possibly at less profit relative to the existing lease terms.
CERP RECOVERY CONSIDERATIONS
The 'B+/RR2' rating assigned to the credit facility reflects Fitch's recovery
expectation in an event of default in 71%-90% range and the 'CCC/RR6' on the
second-lien notes reflects Fitch's expectation of minimal recovery. The
recovery analysis takes into account Fitch's stressed enterprise value
estimate of $3.1 billion, and standard assumptions including a 10% of EV
assumption for administrative claims equal to 10% of EV, and an assumption
that the $269.5 million revolver is fully drawn at the time of default. The EV
calculation assigns multiples in the range of 6.0x for Harrah's Laughlin to
7.5x for Paris and assumes EBITDA stresses of 15%-20% on LTM EBITDAs. Fitch
estimates a stressed EV value of roughly $360 million for Linq/Octavius.
CERP RATING SENSITIVITIES
As mentioned above positive rating action is largely precluded with respect to
CERP's IDR as long as CEOC's credit profile remains weak. A debt restructuring
at CEOC that leaves CEOC financially healthier or not part of the CEC
consolidated group could allow for CERP's IDR to move higher within the 'B'
category to the extent CERP's stand-alone financial profile improves. CERP's
gross leverage migrating towards 7x could a catalyst for an upgrade to 'B' IDR
assuming the CEOC overhang is addressed. However, Fitch expects leverage to
remain above 8x through its projection horizon (2016).
Fitch would consider downgrading CERP or revising its Outlook to Negative if
Fitch has reason to believe that CEC has ample flexibility to extract value
out of CERP beyond what would be reasonably expected under standard
restrictive payment covenant terms. Also leverage remaining above 9x for an
extended period, especially closer to CERP's maturities, and/or FCF declining
close to zero could precipitate negative rating action.
CEOC RATING DRIVERS
The CERP transactions are viewed neutrally from CEOC's credit point of view.
On the positive side, the PropCo refinancing leaves CEC's interest in the
interactive business untouched. Fitch previously alluded to the risk that CEC
may contribute a share of the interactive assets to the PropCo as part of a
refinancing or a restructuring at the PropCo. This could have diluted CEOC's
recovery prospects since CEC guarantees CEOC debt and could possibly be
required to contribute to CEOC creditors a potion or CEC's entire stake in the
interactive business in an event default CEOC.
Negatively, the PropCo debt refinancing is likely to leave CEC with less
flexibility in terms of extracting cash out of the PropCo assets, which in
turn reduces the amount of ongoing support CEC may lend to CEOC. However,
previously CEC used PropCo cash flows and management fees to repurchase CMBS
debt at the PropCo and Fitch was not heavily factoring the support from the
PropCo in the CEOC credit analysis.
CEOC's 'CCC' IDR with a Negative Outlook reflects CEOC's negative FCF and the
associated heightened risk of a default. Fitch projects $1.2 billion in
negative FCF at CEOC for 2013 and negative $800 million for 2014. Fitch's
estimate for 2013 FCF includes $1.35 billion in EBITDA, $1.9 billion in
interest expense and $650 million in capital expenditures not being funded
with debt. In 2014, FCF improvement largely reflects reduction in capital
expenditures, which Fitch estimates at $250 million, and modest same-store
EBITDA growth. The lower capital spending is offset by the loss of Plant
Hollywood Las Vegas, which is being sold to Caesars Growth Properties (CGP)
along with other CEOC assets for $360 million.
Pro forma for the sale of Planet Hollywood and the Macau land, which is
expected to generate additional $420 million in proceeds, Fitch estimates
CEOC's excess cash at $1.8 billion as of June 30, 2013. This is net of cage
cash, which Fitch estimates at $350 million. Fitch does not count CEOC's
revolver in the liquidity calculation since the extended portions is just
adequate to support CEOC's outstanding letters of credit. Taking into account
the cash burn discussed above and $1 billion in maturities coming due in 2015
(includes $427 million related to notes held by Harrah's BC, Inc.), Fitch
projects CEOC's liquidity running out sometime in 2015.
In 2016, outside of first lien debt, CEOC has $1.05 billion in unsecured debt
coming due ($324 million held by Harrah's BC, Inc.). CEOC will have to rely on
its remaining first lien capacity (credit facility has a $1.15 billion
accordion), intercompany cash infusions from CEC, or possibly additional asset
sales to meet these maturities.
The CGP transaction reduces the potential willingness and/or ability of CEC
and the sponsors to provide support CEOC, if executed as contemplated.
Additionally, the transaction weakens the long-term standalone credit profile
of CEOC, thereby increasing CEOC's reliance on such support to maintain
The primary considerations that lead Fitch to this view include:
--The transaction could effectively insulate 23% - 43% of the value of the CGP
entity against a potential default at CEOC. CEC guarantees CEOC's debt and if
the guarantee were called on by CEOC creditors, Fitch believes that CEC would
be required to use all of its available assets to perform under the guarantee.
With the transaction finalized, CEC and the sponsors may have less incentive
to support CEOC if they view CEOC as insolvent knowing that they will retain
at least a 23% economic stake in CGP assets.
--Caesars Acquisition Corp. (CAC), the holding company that will facilitate
sponsors' and participating stockholders' investment in CGP, will have 100%
voting rights in CGP. CAC will likely opt to maintain cash at CGP versus
paying dividends as indicated in CAC's S-1 filing.
--CGP liquidation provisions benefit CAC over CEC. CAC may elect to liquidate
CGP after five years of the transaction being finalized. Upon liquidation, CAC
would be entitled to receive its contributed share plus a 10.5% annual rate of
return on assets contributed ($500 million - $1.2 billion) before CEC receives
--Positively, the transaction will inject $500 million - $1.2 billion into the
overall enterprise. However, the capital infusion comes at the expense of
diluting CEC's ownership in CGP's assets and the investment return hurdle rate
of 10.5% is very high. Therefore, CGP needs to reflect superior growth in
order to materially benefit CEC directly and CEOC indirectly.
CEOC RECOVERY CONSIDERATIONS
Fitch's 'RR3' Recovery Rating on first lien debt implies an expected recovery
at the high end range of the 51%-70% range for 'RR3'. This is based on
admittedly cautious assumptions: zero value for CEOC's 'other' segment and CEC
guarantee, 7.0x blended EBITDA multiple, 10% of EV for administrative claims,
and 0% EBITDA growth. But with CEOC being roughly 9x leveraged through the
first lien (excluding non-guarantor subsidiary debt and EBITDA), strong
recovery is far from certain, especially taking into account CEOC's aging
facilities and exposure to competitive regional markets.
CEOC RATING SENSITIVITIES
Fitch may downgrade CEOC's IDR to 'CC' or lower if a default of some kind
seems more imminent. Potential triggers may include near depletion of
liquidity, a maturity becoming current on CEOC's financial statements, CEOC
soliciting a debt exchange program, or CEC engaging financial advisors
regarding its financial position. CEOC violating its 4.75x senior secured net
leverage maintenance covenant could also be a downgrade driver. As of June 30,
2013 CEOC's financial covenant was at 4.33x, providing a 9% cushion.
An upgrade is unlikely in the near to medium term, as Fitch sees no clear path
to a sustainable FCF profile outside of the top-line growth trends tracking
well above Fitch's base case scenario. Federal legalization of online poker
would be viewed positively, though the immediate effect on cash flow is
unclear. Also, Caesars' online gaming subsidiary (Caesars Interactive) is
outside of CEOC and online gaming is progressing at the state rather than
CHESTER DOWNS RATING DRIVERS
The Negative Outlook on Chester Down and Marina, LLC's (Chester Downs, dba
Harrah's Philadelphia) 'B-' IDR reflects continued negative gaming revenue
trends in the Philadelphia market and Fitch's expectation of increased
competition in the area once a second a casino opens within the city of
Philadelphia. The IDR and the Negative Outlook also reflect Chester Downs'
99.5% ownership by CEOC, which has capacity to extract cash out of Chester
Downs. Chester Down's restricted payment covenant is somewhat relaxed with the
restricted payment basket based on EBITDA minus 1.4x interest expense.
Despite market wide gaming revenue declines, Chester Downs managed to
stabilize its EBITDA through cost containment measures. Leverage and LTM FCF
as of June 30, 2013 are commensurate with 'B-' IDR and provide some cushion
against additional market weakness and potential future competition. Chester
Downs also has grown its cash balance, which can potentially be used to redeem
notes in anticipation of a competing facility opening around 2016/2017
timeframe. However, Fitch believes it is likely that CEOC will pull all or
most of the cash out that is permitted under the covenants given CEOC's
liquidity needs and the relaxed restricted payment covenants discussed above.
CHESTER DOWNS RECOVERY CONSIDERATION
The 'BB-/RR1' rating on Chester Downs' $330 million in senior secured notes
reflects Fitch's expectation of better than 90% recovery in an event of
CHESTER DOWNS RATING SENSITIVITIES
Fitch could potentially revise Chester Down's Outlook to Stable if Chester
Down's revenues stabilize and/or Chester Downs uses cash on hand to redeem
notes outstanding. Alternatively, Fitch may downgrade Chester Downs' IDR to
'CCC' if top line continues to get pressured and/or financial cushion
deteriorates to a point that Fitch's base case projections after incorporating
the new casino in Philadelphia would point to negative FCF.
Pennsylvania's gaming regulator is currently reviewing six gaming applications
for Philadelphia's second gaming license. Applicants include companies
associated with or owned by Wynn Resorts, Mohegan Tribal Gaming Authority,
Isle of Capri and Penn National. Fitch expects SugarHouse to be most affected
when a second Philadelphia license opens; however, Fitch believes that
Harrah's Philadelphia, located about 20 miles south from downtown will also be
affected, but to a lesser degree.
Factors Fitch is weighting with respect to potential rating action related to
the license include the timing of license being awarded, the scale and
location of the development and Chester Down's financial profile at the time
the license is awarded. The longer than expected duration of bidding process
for the Philadelphia license is a positive credit factor for Chester Downs.
The process is being extended by a lawsuit filed by the owners of SugarHouse
Fitch assigns the following ratings:
Caesars Entertainment Resort Properties, LLC
--IDR 'B-'; Outlook Stable;
--Senior secured first-lien credit facility 'B+/RR2';
--First-lien notes 'B+/RR2';
--Second-lien notes 'CCC/RR6';
Fitch affirms the following ratings:
Caesars Entertainment Corp.
--Long-term IDR at 'CCC'; Outlook Negative.
Caesars Entertainment Operating Co.
--Long-term IDR at 'CCC'; Outlook Negative;
--Senior secured first-lien revolving credit facility and term loans at
--Senior secured first-lien notes at 'CCC+/RR3';
--Senior secured second-lien notes at 'CC/RR6';
--Senior unsecured notes with subsidiary guarantees at '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 at 'B-'; Outlook Negative;
--Senior secured notes at 'BB-/RR1'.
Caesars Linq, LLC & Caesars Octavius, LLC
--Long-term IDR at 'CCC'; Outlook Negative;
--Senior secured credit facility at 'CCC+/RR3';
Corner Investment PropCo, LLC
--Long-term IDR at 'CCC';
--Senior secured credit facility at 'B-/RR2'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'
(Nov. 13, 2012);
--'Distressed Debt Exchange' (Aug. 2, 2013);
--'2013 Outlook: U.S. Gaming - Return Generation in Full Swing' (Dec. 17,
--'U.S. Gaming Recovery Models - Second-Quarter 2013' (Aug. 21, 2013);
--'U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.'
(Sept. 5, 2012);
--'Fitch: Caesars Growth Partners Transaction Negative for OpCo Creditors;
Provides Forward View' (May 22, 2013);
--'Fitch 50 -- Structural Profiles of 50 Leveraged U.S. Credits' (July 11,
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Distressed Debt Exchange
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
U.S. Gaming Recovery Models -- Second-Quarter 2013
U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.
Fitch 50 -- Structural Profiles of 50 Leveraged U.S. Credits
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Fitch Ratings, Inc.
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