Caesars Entertainment Corp. (CZR:US)’s $2.2 billion property sale to an affiliate raises the chances the world’s most-indebted casino operator will force a restructuring of its bonds at a loss to investors.
By selling four casinos to Caesars Growth Partners LLC, the unprofitable (CZR:US) company will receive proceeds that Chief Executive Officer Gary Loveman said will help pay down loans. That may help the company persuade those lenders to amend its credit agreements, allowing it to restructure high-cost bonds on more attractive terms, according to CreditSights Inc.
Caesars’ $21 billion of long-term debt is an albatross for a business whose cash flow (CZR:US) fails to meet its more than $500 million of quarterly interest expense following a 2008 leveraged buyout. After refinancing more than $4 billion of mortgages, selling assets and issuing equity to help repurchase bonds at a discount, the owner of Caesars Palace and Harrah’s Las Vegas may be a step closer to pushing creditors to exchange notes trading below 50 cents on the dollar.
“The company is positioning it so that there’s really not a lot of options for the bondholders, and therefore the only way out is to do a distressed-debt exchange,” Chris Snow, an analyst at CreditSights in New York, said in a telephone interview. “They’re taking some of these assets and moving them to high ground, and essentially allowing the flood to take over the rest.”
A distressed-debt exchange is when a company offers new securities in exchange for those currently held by creditors, forcing a reduction in principal. Investors who agree to the swap believe they’ll receive a superior return than if the company filed for bankruptcy.
Stephen Cohen, a spokesman for Caesars, declined to comment on whether the company would attempt to use proceeds from the asset sale to amend the terms of its bank loans.
Caesars’ operating unit, which has its own assets and liabilities, accounts for $17.7 billion of the company’s debt (CZR:US), according to data compiled by Bloomberg. The obligations are the result of the buyout, when Apollo Global Management LLC and TPG Capital acquired the company, then named Harrah’s Entertainment Co., in a $30.7 billion deal.
Fran McGill, a spokesman for Apollo at Rubenstein Associates Inc., and Lisa Baker, a spokeswoman for TPG at Owen Blicksilver Public Relations Inc., declined to comment on the company’s attempts to restructure debt.
Legal documents governing the debt show the company may be able to remove a so-called parent guarantee on the second-lien obligations if a similar pledge were removed from the terms on its bank loans, according to Justin Forlenza, an analyst at independent credit-research firm Covenant Review LLC. That would leave bondholders with less recourse to other company assets should the operating unit file for bankruptcy.
A $1.8 billion cash infusion from the asset sale may be used to entice loan holders to release the guarantee, Forlenza said. “It wouldn’t be surprising if they went that route with bank lenders,” he said.
Loveman, Caesars’ CEO, declined to elaborate on how the company would use the proceeds beyond indicating that “some portion” would go toward repaying bank debt, according to the transcript of a March 3 conference call with analysts and investors to discuss the property sale.
Caesars’ $3.31 billion of 10 percent, second-lien notes due December 2018 have since dropped 4 cents on the dollar to 44.25 cents at 10:29 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s approaching the record-low of 43.5 cents in December.
Prices on the those bonds would need to fall further for the company to propose an exchange price that would materially improve its finances, according to Michael Paladino, a credit analyst at Fitch Ratings.
“The economics of an exchange at the current level don’t do much,” Paladino said in a telephone interview.
While the sale of Bally’s, Quad and Cromwell casino-hotels in Las Vegas, as well as Harrah’s New Orleans, to Caesars Growth Partners will leave the operating subsidiary with more than $3 billion of cash, the company’s highest operating income since 2009 still isn’t enough to cover interest on its obligations.
Operating profit (CZR:US) rose to $1.02 billion in the 12 months through September from $993 million a year earlier, Bloomberg data show. That’s about $1.2 billion short of its annual interest expense. The company is scheduled (CZR:US) to report fourth-quarter earnings on March 11.
“If you did away with the capital structure, the company would be very profitable,” CreditSights’ Snow said. “The last remaining obstacle, which is a sizable obstacle, is the amount of debt” at the operating unit, Snow said.
The latest sale represents another step by Caesars to isolate assets from its weaker operating subsidiary, according to Paladino, who rates the second-lien bonds CC. That grade “indicates that default of some kind appears probable.”
In July, Caesars announced a plan to let shareholders buy into a new unit that will own part of its interactive business and other divisions. Two months later, it shifted ownership of a Las Vegas luxury tower and an observation wheel into its property unit as part of a refinancing deal.
This week’s transaction means the operating unit “will have far fewer assets in Las Vegas where the market is improving -- it will be left with Atlantic City assets where the market continues to basically tank,” Kim Noland, an analyst at Gimme Credit LLC, said in an e-mail. “Anticipated future steps will include a distressed-debt exchange and possibly the removal of the parent guarantee.”
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