Caesars Entertainment Corp. (CZR), the casino company taken private in a $30.7 billion leveraged buyout just before the credit crisis, has taken steps in recent weeks that signal it’s poised for a massive debt restructuring that will saddle creditors with steep losses.
“We expect that something is imminent,” Alex Bumazhny, a credit analyst with Fitch Ratings in New York, said in a telephone interview. Fitch, which has a CCC rating on Caesars that’s reserved for borrowers where “default is a real possibility,” said it expects the company to attempt a debt-for-equity exchange with a group of junior creditors.
Caesars, with properties from Caesars Palace in Las Vegas to Harrah’s Atlantic City, has had only one profitable year since 2008 as it struggles to service $21 billion of long-term debt amid a drop in consumer spending. Bondholders have suffered losses of $2.6 billion since September as the company gained regulatory approval for a refinancing that shielded valuable assets from lenders. Last week, advisers to a group that owns senior bonds of a Caesars unit entered into talks to restructure its borrowings, said two people familiar with the matter.
The events are putting Las Vegas-based Caesars on a path toward a $12.7 billion debt restructuring that pits Leon Black and David Bonderman, the buyout titans who took the company private with a $6 billion equity investment, against distressed-debt investors including David Tepper and Howard Marks.
While owners of the company’s $6.35 billion of higher-priority bonds may escape with limited losses, holders of the company’s lower-ranking notes, including $5.2 billion of second-lien securities, are facing the likelihood of getting no more than 20 percent of the debt’s face value and could recover nothing, Fitch said in a July 30 report.
Advisers to a group of the senior creditors have signed confidentiality agreements allowing them to see sensitive information and begin talks toward a deal to pare Caesars’ debt load, the people with knowledge of the talks said last week. In one sign Caesars or the two parties are willing to negotiate, the company has agreed to pay the fees of the group’s advisers, investment bank Miller Buckfire & Co. and law firm Kramer Levin Naftalis & Frankel LLP, said the people, who asked not to be identified because the discussions are private.
That contrasts with actions taken by a group of the junior creditors including Tepper’s Appaloosa Management LP and Marks’ Oaktree Capital Group LLC, which sent Caesars’ most indebted unit a notice in June alleging it defaulted on its obligations when it transferred assets to an affiliate and stripped creditors of a guarantee by the casino operator’s parent company.
“The company is negotiating with first-lien holders and they’re going back and forth suggesting new structures,” John Kempf, an analyst at RBC Capital Markets, said in a telephone interview. “The question is, will the second-liens agree to this?”
Stephen Cohen, a spokesman for Caesars at Teneo Holdings LLC, declined to comment.
Caesars needs to rein in its massive debt load because it hasn’t been able to generate enough cash to cover its interest payments. Black’s Apollo Global Management LLC and Bonderman’s TPG Capital loaded the company with debt just months before the 2008 collapse of Lehman Brothers Holdings Inc. caused credit markets to seize up and sent Las Vegas and the regional casino business into its worst slump ever.
Since then, Caesars has extended maturities, raised equity and sold assets to stave off bankruptcy. It issued stock in the parent company in February 2012. Then in May it announced the $1.75 billion refinancing approved last month over the objections of bondholders.
Caesars sold properties including Harrah’s New Orleans and Bally’s Las Vegas to an affiliate, putting the assets out of reach of creditors of Caesars Entertainment Operating Co., or CEOC, which owns the bulk of the company’s 51 casinos. That subsidiary also sold a 5 percent stake in May to outside investors, a move that Caesars said allowed it to remove a guarantee on much of the unit’s debt.
“The financing transaction will, in our view, ultimately pave the road for CEOC’s bankruptcy rather than forestall it,” Sidney Levinson, a Jones Day attorney in Los Angeles who represents holders of more than $1 billion of the unit’s second-lien notes, told Illinois Gaming Board members just before the regulating body approved the deal on July 24.
The biggest piece of the second-lien debt, $3.6 billion of 10 percent notes due in December 2018 have dropped 6 cents to a record-low 31 cents on the dollar since the gaming board approval, according to the Financial Industry Regulatory Authority’s Trace bond-price reporting system. They’ve fallen from as high as 52 cents in January.
The market value of all bonds of the operating unit have plunged to $12.6 billion as of July 31 from $15.3 billion last September, the month that Caesars asked investors to swap $4.74 billion of commercial mortgage-backed securities and loans for $4.85 billion of debt issued out of a new unit, data compiled by Bloomberg show.
While Caesars Entertainment now has a market value of $2.3 billion and another $1.6 billion at an affiliate called Caesars Acquisition Co. (CACQ), the private stake sale of the operating unit in May for $6.1 million suggests the equity overall for the operating unit is valued at $122 million.
A deal for all the company’s second-lien notes could reduce the operating unit’s $1.7 billion annual interest expense by $550 million, according to Fitch’s Bumazhny.
Junior creditors will need to build allies in new trustees appointed last week after U.S. Bancorp resigned as trustee for more than $12 billion in debt. Caesars also named a management team for the operating unit as it prepares for a public stock listing, the company said in a July 30 statement.
The second-lien note holders must decide whether to go to court to reverse Caesars’ asset sales and the loss of the parent guarantee or cut a deal with Caesars. If not, they risk seeing a restructuring offer accepted by other creditors that leaves them with little or nothing for their holdings.
In a debt-for-equity exchange with the junior creditors, Caesars might sweeten the pot with some of the $2.8 billion in cash on the operating company’s books, according to Bumazhny.
“We don’t think there’s much equity beyond the first liens,” Bumazhny said. “There’s nothing based on collateral alone.”
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