Fitch: Caesars CGP Related Transactions Positive for Equity Holders and CERP; Negative for CEOC

  Fitch: Caesars CGP Related Transactions Positive for Equity Holders and   CERP; Negative for CEOC  Business Wire  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 CAC.  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.  RECOVERY CONSIDERATIONS  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 debt.  FCF CONSIDERATIONS  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 'CCC+/RR3';  --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 ''.  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, 2013);  --'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 Exchange Considerations)  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 Subsidiary Linkage  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.  Contact:  Fitch Ratings, Inc. Primary Analyst Alex Bumazhny, CFA, +1-212-908-9179 Director Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst Michael Paladino, CFA, +1-212-908-9113 Senior Director or Media Relations Brian Bertsch, +1-212-908-0549  
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