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S&P Cuts Caesars’ Grade to CCC- as Cash Burn Raises Default Odds

Standard & Poor’s downgraded Caesars Entertainment Corp.’s credit rating by two steps to CCC-, saying a restructuring is “increasingly likely over the near term.”

“Caesars’ capital structure is unsustainable,” S&P credit analysts Melissa Long and Stephen Pagano wrote in a note today. “The company is burning cash to fund capital expenditures and interest payments, and we expect the company will need additional liquidity in 2015 to cover interest, capital expenditures, and debt maturities.”

The largest owner of casinos in the U.S. has struggled to reconcile its debt load with consumers curbing their discretionary spending since the Las Vegas-based company was purchased in a $30.7 billion leveraged buyout by Apollo Global Management LLC and TPG Capital in 2008. Caesars has since sold assets, bought back debt at a discount, sold stock to the public and refinanced loans.

Caesars’ plan to sell four properties to its affiliate Caesars Growth Partners LLC for $2.2 billion “is the first of a series of steps, which could include exchange offers, that Caesars is likely to undertake in 2014” to address its capital structure, the analysts wrote. Some debt holders are challenging that transaction as fraudulent.

S&P lowered its estimate of recoveries for holders of the operating company’s first-lien debt to between 50 percent and 70 percent, down from an earlier range of 70 percent to 90 percent.

Caesars will go through more than $1.2 billion in cash this year to meet about $3 billion in fixed expenses, the analysts wrote. The casino company probably won’t be able to meet fixed charges of about $3.5 billion next year, they said.

The company burned $730.5 million in cash last year, from $497.5 million the year before and $149.4 million in 2011, according to data compiled by Bloomberg.

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