Caesars Uses $100 Million Lure for Asset Shift: Distressed Debt
Caesars Entertainment Corp. (CZR) is about to find out whether $100 million is enough to entice lenders to finance a plan that would put valuable casino assets out of the reach of most of its current creditors in case of a bankruptcy.
That’s how much in extra interest above market rates the company is offering to pay on $1.18 billion of term loans due in March 2021 that it is raising through a unit created last year called Caesars Growth Partners, according to data compiled by Bloomberg. Proceeds, along with $675 million from a planned bond sale, will fund the purchase of four casinos from the parent -- a transaction some debt holders are challenging as fraudulent.
Caesars has been struggling to reconcile its debt load with U.S. consumers restraining discretionary spending since it was purchased in a $30.7 billion leveraged buyout put together by Apollo Global Management LLC and TPG Capital at the peak of the last takeover boom in 2008. The shift of assets would exert pressure on existing lenders, enabling Caesars’ management to carry out a favorable restructuring of its high-cost bonds, according to Chris Snow, an analyst at debt-research firm CreditSights Inc. in New York.
“There’s sort of a ‘Caesars premium’ that goes into the new debt,” Snow said in a telephone interview. “There is risk of these assets being clawed back in case of a bankruptcy at the operating-company level. It’s also clear to lenders that the sponsors would move to protect their interest over that of the creditors if operating trends go the other way.”
The company announced last month that it is selling the Bally’s, Quad and Cromwell casino-hotels in Las Vegas, as well as Harrah’s New Orleans to Caesars Growth Partners for about $2.2 billion.
That unit holds the Planet Hollywood Casino in Las Vegas and the Caesars online gambling operations. It is controlled by the parent company, with a 42 percent minority stake owned by Caesars Acquisition Co. (CACQ), a publicly traded company created last year through a rights offering to Caesars shareholders.
Stephen Cohen, a spokesman for Caesars at Teneo Holdings LLC in New York, declined to comment.
The new, seven-year term loan will yield at least 6.75 percent. That’s a 1.3 percentage point interest-rate premium, or about $15 million in additional annual payments, relative to the average yield on similarly rated debt, Bloomberg data show.
Caesars’ financing for the deal also includes a $150 million revolving credit line and $675 million of second-lien notes. The loan is being arranged by Credit Suisse Group AG and commitments are due by April 8, according to a person with knowledge of the matter, who asked not to be identified because they’re not authorized to speak about it.
The floating-rate debt is being offered at a one-cent discount, reducing proceeds for the company and increasing yield for investors.
Creditors accused the casino operator of breaching its fiduciary duty and demanded the cancellation of the company’s transfer of properties to affiliates, according to a letter received by Caesars on March 21.
The letter challenges an October deal involving Planet Hollywood and a Baltimore property, and the casino sales announced last month in which the assets are being sold to Caesars Growth Partners, according to the filing by the Las Vegas-based company. The letter also questions the transfer last year of the Octavius Tower and Project Linq assets in Las Vegas to another entity, Caesars Entertainment Resort Properties.
“The letter moved valuations and security prices and is a thorn in the side of the company,” Snow said. “It’s a signal that bondholders are trying to put a little bit more pressure.”
Caesars’ $3.31 billion of 10 percent, second-lien notes due December 2018 traded at 43.7 cents on the dollar to yield 35.4 percent yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They’d dropped to a low of 41.5 cents on March 20, data show.
The notes are guaranteed by assets at Caesars Entertainment Operating Co. Inc., the unit from which casinos are being transferred, company filings show.
Caesars lost almost $3 billion last year on revenue of $8.6 billion. Since selling shares to the public in February 2012, Caesars has divested properties, refinanced loans and created a second publicly traded entity to finance new ventures and raise cash to help the parent repair its balance sheet.
“Debt investors in Caesars are a Who’s Who of the credit world, and they’re getting sliced and diced right now,” Anish Vora, a New York-based analyst with New Albion Partners LLC, said in a telephone interview. “A judge might deem these illegal transfers of assets.”
More than 77 percent of the casino company’s $23.3 billion of debt resides in its operating unit, according to a March 17 regulatory filing.
The transfer of casinos from Caesars Entertainment Operating Co. leaves only the flagship Caesars Palace within Las Vegas under that unit, along with Atlantic City properties and most of Caesars’ other regional casinos across the U.S.
The bondholders’ letter will “get quite a bit of scrutiny,” Alex Bumazhny, a Fitch Ratings analyst, said in a telephone interview. “They are selling quite a bit of attractive assets from CEOC to other entities.”
The new term loan will yield the higher of 6.75 percent or 5.75 percentage points more than the London interbank offered rate. Libor, the rate at which banks say they can borrow from each other. Libor was set at 23 basis points yesterday.
The interest compares with an average yield of 5.42 percent on first-lien, institutional loans tracked by Bloomberg, that have single B ratings from Moody’s Investors Service and Standard & Poor’s.
Another reason for concern for lenders on the new loan is the reliance of Caesars Growth Partners on the parent’s Total Rewards program that is held at the operating unit, Bumazhny said.
The loyalty program has about 45 million members and is used to market promotions and generate customer playing activities across its network of casinos, according to the company’s 10-K filing.
In the event of a default at the operating unit, the new owners may choose to cancel licensing contracts that allows the other units to access the program, according to Bumazhny.
“That could be problematic for the new entity,” he said. “People are still concerned about its linkage to the operating company.”