Fitch: Caesars CGP Related Transactions Positive for Equity Holders and
CERP; Negative for CEOC
NEW YORK -- March 3, 2014
The Caesars Entertainment Corp.'s (CEC) announced transactions between Caesars
Entertainment Operating Company, Inc. (CEOC; OpCo) and Caesars Growth Partners
(CGP) are positive for CEC's and Caesars Acquisition Company's (CAC)
stockholders and for Caesars Entertainment Resort Property's creditors,
according to Fitch Ratings.
However, Fitch believes the announced transactions are a negative for CEOC
creditors because they further deteriorate certain debtholders' recovery
prospects in an event of default and exacerbate an already weak free cash flow
profile at CEOC. The OpCo near-term liquidity is improved, as the restricted
group's pro forma liquidity of nearly $3 billion can potentially satisfy the
cash needs at CEOC through 2015 and possibly through 2016.
CEOC plans to sell The Quad, Bally's Las Vegas and The Cromwell on the Las
Vegas Strip and Harrah's New Orleans to CGP for a total cash consideration of
approximately $1.8 billion. The transaction is expected to close by the
first-half 2014. CEC plans to use part of the proceeds to repay loans at CEOC
but did not specify how much.
SHARED SERVICES JV AND GROUP LINKAGE CONSIDERATIONS
The transaction agreement also calls for creation of a shared services joint
venture (JV), a new entity that will provide certain operating services to all
three of CEC's major subsidiaries. This would be a departure from the existing
scheme under which CEOC provides certain services to CERP and CGP for a fee.
It was not specified whether Total Rewards, which is part of CEOC, will be
contributed to the new JV.
Fitch sees the asset sales and the proposed creation of a shared services JV
as a positive for CEC and CAC equity and reflects another step towards moving
assets away from the weaker CEOC into healthier entities and isolating the
healthier entities from a potential filing at CEOC. These transactions follow
the sale of the Linq project and the Octavius Tower into CERP and Horseshoe
Baltimore and Planet Hollywood Las Vegas into CGP. CEC's coveted online gaming
assets were also transferred to CGP, which is 42% owned and 100% controlled by
CERP's linkage to CEOC vis-a-vis the shared services agreement has been a
negative credit consideration for CERP, whose Issuer Default Rating (IDR)
assigned by Fitch is 'B-', one notch higher compared to CEOC's 'CCC' IDR. The
creation of a shared services JV weakens the linkage to CEOC and potentially
allows for CERP's IDR to move higher as its stand-alone credit profile
improves. Whether Total Rewards will ultimately be included in this JV will be
a factor in Fitch's ability to de-link the credit profiles of CEOC and CERP.
CEC guarantees the debt at CEOC and could potentially attempt to strip the
guarantee as another step to further isolate the parent and its healthier
entitles from CEOC. Fitch discusses the guarantee and the guarantee fallaway
mechanics in its report 'Caesars Entertainment Corp. (Parent Guarantee and
Potential Debt for Equity Exchange Considerations)' dated Nov. 18, 2013,
available on the Fitch website.
If CEOC uses the bulk of the cash proceeds to repay a portion of $4.4 billion
in outstanding term loans, the announced transaction will be roughly leverage
neutral for the first-lien holders and leveraging for the more junior
creditors. Fitch calculates CEOC's gross leverage as of Sept. 30, 2013 through
the first-lien and through the pre-LBO unsecured senior notes at about 9x and
15x, respectively. Fitch estimates the EBITDA of the assets being sold
(excluding Cromwell) at roughly $200 million based on comparable assets in
respective markets, which would equate to a 9x EV/EBITDA transaction multiple.
There is considerable cushion in the first-lien's 'RR3' Recovery Rating for
further deterioration in recovery prospects, as Fitch downgraded CEOC's
first-lien debt to 'CCC+/RR3' from 'B-/RR2' in late 2012 following the
announced sale of Harrah's St. Louis and issuance of incremental first-lien
The transaction is slightly free cash flow (FCF) negative for CEOC in the near
term but has a larger impact longer-term because the assets with better growth
prospects are being removed from the restricted group. Assuming $200 million
of EBITDA and about $40 million of maintenance capex associated with the sold
assets and a range of $90 million-$140 million in potential interest expense
savings from the bank loan repayments, the near-term negative recurring FCF
impact could be $20 million-$70 million, which is not very material relative
to CEOC's existing cash burn.
Longer term, the incremental FCF burn from the transaction could be more
pronounced as the transaction leaves CEOC with a heavier exposure to the
weaker U.S. regional casino segment. Following the announced transaction and
the earlier sale of Planet Hollywood, the only remaining major Las Vegas Strip
asset in CEOC will be Caesars Palace, and Fitch estimates that total Las Vegas
Strip EBITDA will comprise less than 20% of CEOC's property EBITDA compared to
almost 30% in 2012. With the transactions, Fitch's base case estimate for FCF
burn in 2015 for CEOC is revised from approximately $600 million upwards to
about $700 million. The reduced forecast also incorporates the recent weakness
in the U.S. regional markets.
Fitch currently rates CEC and the related entities as follows:
Caesars Entertainment Corp.
--Long-term IDR at 'CCC'; Outlook Negative.
Caesars Entertainment Operating Co.
--Long-term IDR 'CCC'; Outlook Negative;
--Senior secured first-lien revolving credit facility and term loans
--Senior secured first-lien notes 'CCC+/RR3';
--Senior secured second-lien notes 'CC/RR6';
--Senior unsecured notes with subsidiary guarantees 'CC/RR6';
--Senior unsecured notes without subsidiary guarantees 'C/RR6'.
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'.
Chester Downs and Marina LLC (and Chester Downs Finance Corp as co-issuer)
--Long-term IDR 'B-'; Outlook Negative;
--Senior secured notes 'BB-/RR1'.
Corner Investment PropCo, LLC
--Long-term IDR 'CCC';
--Senior secured credit facility at 'B-/RR2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'
(Nov. 19, 2013);
--'Distressed Debt Exchange' (Aug. 2, 2013);
--'U.S. Gaming Recovery Models - Third-Quarter 2013' (Jan. 29, 2014);
--'2014 Outlook: U.S. Gaming (Deleveraging Potential) (Dec. 16, 2013);
--'Caesars Entertainment Corp. (Parent Guarantee and Potential Debt for Equity
Exchange Considerations)' (Nov. 18, 2013);
--'Fitch 50 -- Structural Profiles of 50 Leveraged U.S. Credits' (July 11,
--'U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.'
(Sept. 5, 2012).
Applicable Criteria and Related Research:
U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.
Fitch 50 -- Structural Profiles of 50 Leveraged U.S. Credits
Caesars Entertainment Corp. (Parent Guarantee and Potential Debt for Equity
2014 Outlook: U.S. Gaming (Deleveraging Potential)
U.S. Gaming Recovery Models -- Third-Quarter 2013
Distressed Debt Exchange
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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