Caesars' assets insufficient to satisfy lenders

Yields on bonds from a Caesars Entertainment Corp. unit are diverging in a sign that the casino company will be unable to satisfy warring creditor classes and increase the odds of a bankruptcy.

"It's difficult to understand how a workout would take place and bind classes outside of bankruptcy," said Janegail Orringer, a credit analyst who follows casino bonds at AllianceBernstein Holding LP, which manages $486 billion. "I don't assign a high likelihood of success to an out-of-court outcome," she said by telephone.

While the company has enough assets to mollify its most senior creditors and has already come to an arrangement with unsecured bondholders, there isn't likely to be enough left for middle-ranking lenders, according to Chris Snow, an analyst at debt-research firm CreditSights Inc. The difference in yields between its first-lien notes due in June 2017 and its second- lien securities maturing in December 2018 has widened to 43 percentage points from 26 points on June 30, before creditor talks began.

Those bonds are obligations of Caesars Entertainment Operating Corp., the division that owns most of the parent's casinos and which will run out of cash by early 2016, according to reports from Goldman Sachs Group Inc. and JPMorgan Chase & Co. Its first-lien creditors would benefit from a speedy restructuring of its $18.3 billion of debt, while second-lien bondholders would do better to keep getting interest payments on notes that yield as much as 65 percent and are likely to receive little in a bankruptcy.

Apollo, TPG

The parent company, loaded with debt by Apollo Global Management LLC and TPG Capital in a $30.7 billion deal at the peak of the last takeover boom in 2008, is talking with senior creditors of the operating unit to craft a restructuring plan that reduces borrowings and curbs $2.15 billion in annual interest expense, four people with knowledge of the matter, who asked not to be identified because the discussions are private, said last week.

Gary Thompson, a spokesman for Las Vegas-based Caesars, Charles Zehren, a spokesman for Apollo at Rubenstein Associates Inc. and Lisa Baker, a TPG spokeswoman at Owen Blicksilver Inc., declined to comment.

'Cram Down'

Caesars' Chief Executive Officer Gary Loveman said in a Sept. 12 statement that the company was "committed to working constructively with creditors to deleverage" its most indebted unit "and create a path toward a sustainable capital structure."

Once it reaches an accord with its first-lien creditors, Caesars may pressure second-lien bondholders to accept a distressed exchange, CreditSights's Snow said by telephone from New York. "If they can get the first-lien creditor group on their side, it might enhance their ability to cram down the seconds," he said.

In a distressed-debt exchange, borrowers offer to swap their outstanding securities for obligations that are in some way inferior. Investors who agree to the exchange believe they will receive a better return than if the company filed for bankruptcy.

Creditor Conflicts

Even if Caesars is successful in obtaining approval for a debt-cutting proposal from the creditors who've engaged in private talks, it will have to convince a wider pool to accept the deal. Some debtholders who have purchased credit-default swaps that would profit from a bankruptcy and others with multiple classes of Caesars securities may be unwilling to sign on to a restructuring that helps some of their holdings at the expense of others.

Investors in the parent company's stock that also own the operating unit's second-lien bonds, for example, might see their equity positions benefit while their bonds decline from a deleveraging transaction.

The operating company, which owns 22 U.S. gaming properties from the flagship Caesars Palace Las Vegas to Horseshoe Tunica in Mississippi, has lost money since 2009, according to regulatory filings and data compiled by Bloomberg. Its net loss for the 12 months through June 30 was $3.29 billion, wider than the full year deficit of $2.99 billion in 2013.

Properties owned by the operating company generated 6.5 percent less revenue in the year ended June 30 than the $6.3 billion collected in 2013 as casino revenue dropped, according to regulatory filings.

'We're Skeptical'

Sales at the parent company fell to $8.56 billion last year from $10.1 billion in 2008. It's been unprofitable every year since 2009, with losses forecast for 2014 and 2015 in a Bloomberg analysts survey.

Through other units, the parent controls casinos including the Paris and Flamingo in Las Vegas as well as online gaming assets like the World Series of Poker and Slotomania.

Moody's Investors Service rates the operating company's debt Caa3 with a negative outlook, a rating that indicates "very weak creditworthiness relative to other domestic issuers." Standard & Poor's rates the company an equivalent CCC-.

"In a sense, it's a tug-of-war," Snow said. "Even if you get one constituent on board with the plan, we're skeptical you can come up with a scheme that is satisfactory with all the parties."