NEW YORK–(BUSINESS WIRE)–
Fitch Ratings expects to assign a ‘B+/RR2′ rating to Caesars Entertainment Resort Properties, LLC’s (CERP) proposed $3.27 billion senior secured first-lien credit facility & $500 million first-lien notes & a ‘CCC/RR6′ rating to CERP’s proposed $1.35 billion in second-lien notes. Fitch has assigned an initial ‘B-’ Issuer Default Rating (IDR) to CERP. Fitch has moreover affirmed the IDRs of Caesars Entertainment Corporation (CEC; Caesars, the parent) & Caesars Entertainment Operating Company (CEOC) at ‘CCC’ & affirms all other related ratings. A full list of rating actions follows at the end of this release.
CERP’s credit facility will consist of a $3 billion term loan & a $269.5 million revolver. The facility, the first-lien notes & the second-lien notes will be guaranteed & secured by Rio, Flamingo, Paris & Harrah’s casino resorts in Las Vegas, Harrah’s in Laughlin, NV, & Harrah’s in Atlantic City, NJ as well as the Octavius Tower & Project Linq assets (together Linq/Octavius). Linq/Octavius will be transferred from CEOC by Caesars.
The Octavius Tower includes 602 rooms, 60 suites & six luxury villas & is part of the Caesars Palace complex, which is part of CEOC. Project Linq includes a 550-foot observation wheel (High Roller), over 260,000 square feet of retail space (some will be leased by other CERP entities) & a redeveloped O’Sheas casino. CEOC will lease Octavius Tower & the O’Sheas casino from CERP for $35 million & $15 million, respectively. Octavius Tower opened in January 2012 & Project Linq will open in phases from late 2013 to early 2014.
CERP will use the proceeds from the proposed financing to repurchase approximately $4.4 billion in outstanding debt at the PropCo & refinance the $450 million term loan used to fund Linq/Octavius. Caesars will pay 99% of par for $3.67 billion in outstanding PropCo mortgage loan notes & 90% of par for $719 million in outstanding mezzanine notes. The repurchases are conditioned upon the acceptance by lenders holding at least 65% of the outstanding aggregate principal amount of the mortgage loan loans (63% accepted as of Sept. 17, 2013) & 85% of the outstanding aggregate principal amount of the mezzanine loans (84% accepted).
CERP RATING DRIVERS
CERP’s ‘B-’ IDR reflects Fitch’s expectation in that pro forma for the transactions & the opening of the Linq components CERP will have sustainable leverage & FCF profiles. The IDR moreover factors in CERP’s relationship with CEC & CEOC. CERP’s positive FCF will allow for modest deleveraging over the near-to-medium term. Liquidity will be solid with a $269.5 million undrawn revolver & no maturities until 2020, when the first-lien debt matures. The second-lien notes will mature 2021.
In its base case, Fitch projects CERP’s leverage at year-end 2014 & FCF for 2014 at 8.9 times (x) & approximately $75 million, respectively. Fitch’s forecasted property EBITDA for 2014 of $627 million includes the following projections:
–$440 million of EBITDA generated by the existing PropCo Las Vegas NV casinos (70% of EBITDA);
–$76 million generated by Harrah’s Atlantic City (12% of EBITDA);
–$42 million generated by Harrah’s Laughlin (7% of EBITDA); and
–$69 million generated by Linq/Octavius, which includes $50 million in lease payments from CEOC & $19 million capturing three-quarters of the High Roller & retail operations (together 11% of EBITDA).
Fitch’s FCF forecast for 2014 takes in to account approximately $90 million of corporate expenses, $365 million of interest expense & $100 million in capital expenditures. The corporate expense assumption takes in to account a management fee structure similar to the one in that is in place at the PropCo; however, terms of the management fee, if there will be one, are not yet determined. The capital expenditures contain the final costs associated with Linq & should moderate to around $60 million in the outer years. Leverage & FCF under Fitch’s base case forecast improves in 2016 to 8.3x & $160 million, respectively. The improvements reflect annual yearly EBITDA growth of about 2% (Las Vegas growth & ramp-up of Linq offset by Atlantic City weakness), decline in annual yearly capital expenditures & a modest reduction in interest expense.
CERP’S RELATIONSHIP WITH CEC AND CEOC
CERP’s ‘B-’ IDR is supported by Fitch’s expectations in that the restricted payment covenants in CERP’s credit agreement will be restrictive & would guard CERP creditors against attempts by CEC to extract value out of CERP & against a potential default at CEOC. Fitch may revisit the ratings if the restricted payment covenants are looser than Fitch’s current expectations.
Regardless of the restrictive payment covenants in place, CERP’s ownership by CEC, which guarantees the debt at the highly leveraged & FCF-negative CEOC, is a key credit risk & will pressure CERP’s IDR. Positive rating pressure on CERP will be constrained by CEC’s ownership & an upgrade is unlikely while there is a heightened probability of default at CEOC.
There is moreover uncertainty with respect to the Linq/Octavius lease payments (about 8% of CERP’s EBITDA) from CEOC to CERP if CEOC defaults. Fitch believes in that in an event CEOC defaults the leases would be affirmed given their strategic importance to CEOC, yet there is acceptable likelihood in that the lease terms will be renegotiated at lesser terms. However, if the leases were rejected, CERP could either monetize the assets or operate the assets itself, albeit possibly at less profit relative to the existing lease terms.
CERP RECOVERY CONSIDERATIONS
The ‘B+/RR2′ rating assigned to the credit facility reflects Fitch’s recovery expectation in an event of default in 71%-90% range & the ‘CCC/RR6′ on the second-lien notes reflects Fitch’s expectation of minimal recovery. The recovery determination takes in to account Fitch’s stressed enterprise value estimate of $3.1 billion, & standard assumptions in addition to a 10% of EV assumption for administrative claims equal to 10% of EV, & an assumption in that the $269.5 million revolver is fully drawn at the time of default. The EV calculation assigns multiples in the range of 6.0x for Harrah’s Laughlin to 7.5x for Paris & assumes EBITDA stresses of 15%-20% on LTM EBITDAs. Fitch estimates a stressed EV value of roughly $360 million for Linq/Octavius.
CERP RATING SENSITIVITIES
As mentioned above positive rating action is largely precluded with respect to CERP’s IDR as long as CEOC’s credit profile remains weak. A debt restructuring at CEOC in that leaves CEOC financially healthier or not part of the CEC consolidated group could allow for CERP’s IDR to move higher within the ‘B’ category to the extent CERP’s stand-alone financial profile improves. CERP’s gross leverage migrating towards 7x could a catalyst for an upgrade to ‘B’ IDR assuming the CEOC overhang is addressed. However, Fitch expects leverage to remain above 8x through its projection horizon (2016).
Fitch would consider downgrading CERP or revising its Outlook to Negative if Fitch has reason to believe in that CEC has ample flexibility to extract value out of CERP beyond what would be reasonably expected under standard restrictive payment covenant terms. Also leverage remaining above 9x for an extended period, especially closer to CERP’s maturities, and/or FCF declining close to zero could precipitate negative rating action.
CEOC RATING DRIVERS
The CERP transactions are viewed neutrally from CEOC’s credit point of view. On the positive side, the PropCo refinancing leaves CEC’s interest in the interactive business untouched. Fitch previously alluded to the risk in that CEC may contribute a share of the interactive assets to the PropCo as part of a refinancing or a restructuring at the PropCo. This could have diluted CEOC’s recovery prospects since CEC guarantees CEOC debt & could possibly be required to contribute to CEOC creditors a potion or CEC’s whole entire stake in the interactive business in an event default CEOC.
Negatively, the PropCo debt refinancing is likely to leave CEC with less flexibility in terms of extracting cash out of the PropCo assets, which in turn reduces the amount of ongoing support CEC may lend to CEOC. However, previously CEC used PropCo cash flows & management fees to repurchase CMBS debt at the PropCo & Fitch was not heavily factoring the support from the PropCo in the CEOC credit analysis.
CEOC’s ‘CCC’ IDR with a Negative Outlook reflects CEOC’s negative FCF & the associated heightened risk of a default. Fitch projects $1.2 billion in negative FCF at CEOC for 2013 & negative $800 million for 2014. Fitch’s estimate for 2013 FCF includes $1.35 billion in EBITDA, $1.9 billion in interest expense & $650 million in capital expenditures not being funded with debt. In 2014, FCF improvement largely reflects reduction in capital expenditures, which Fitch estimates at $250 million, & modest same-store EBITDA growth. The lower capital spending is offset by the loss of Plant Hollywood Las Vegas, which is being sold to Caesars Growth Properties (CGP) along with other CEOC assets for $360 million.
Pro forma for the sale of Planet Hollywood & the Macau land, which is expected to generate additional $420 million in proceeds, Fitch estimates CEOC’s excess cash at $1.8 billion as of June 30, 2013. This is net of cage cash, which Fitch estimates at $350 million. Fitch does not count CEOC’s revolver in the liquidity calculation since the extended portions is just adequate to support CEOC’s outstanding letters of credit. Taking in to account the cash burn discussed above & $1 billion in maturities coming due in 2015 (includes $427 million related to notes held by Harrah’s BC, Inc.), Fitch projects CEOC’s liquidity running out sometime in 2015.
In 2016, outside of 1st lien debt, CEOC has $1.05 billion in unsecured debt coming due ($324 million held by Harrah’s BC, Inc.). CEOC will have to rely on its remaining 1st lien capacity (credit facility has a $1.15 billion accordion), intercompany cash infusions from CEC, or possibly additional asset sales to meet these maturities.
CGP TAKEAWAY
The CGP transaction reduces the potential willingness and/or ability of CEC & the sponsors to provide support CEOC, if executed as contemplated. Additionally, the transaction weakens the long-term standalone credit profile of CEOC, thereby increasing CEOC’s reliance on such support to maintain solvency.
The primary considerations in that lead Fitch to this view include:
–The transaction could effectively insulate 23% – 43% of the value of the CGP entity against a potential default at CEOC. CEC guarantees CEOC’s debt & if the guarantee were called on by CEOC creditors, Fitch believes in that CEC would be required to use all of its available assets to perform under the guarantee. With the transaction finalized, CEC & the sponsors may have less incentive to support CEOC if they view CEOC as insolvent knowing in that they will retain at least a 23% economic stake in CGP assets.
–Caesars Acquisition Corporation (CAC), the holding company in that will facilitate sponsors’ & participating stockholders’ investment in CGP, will have 100% voting rights in CGP. CAC will likely opt to maintain cash at CGP versus paying dividends as indicated in CAC’s S-1 filing.
–CGP liquidation provisions benefit CAC over CEC. CAC may elect to liquidate CGP after five years of time of the transaction being finalized. Upon liquidation, CAC would be entitled to receive its contributed share plus a 10.5% annual yearly rate of return on assets contributed ($500 million – $1.2 billion) before CEC receives anything.
–Positively, the transaction will inject $500 million – $1.2 billion in to the overall enterprise. However, the capital infusion comes at the expense of diluting CEC’s ownership in CGP’s assets & the investment return hurdle rate of 10.5% is very high. Therefore, CGP needs to reflect superior growth in order to materially benefit CEC directly & CEOC indirectly.
CEOC RECOVERY CONSIDERATIONS
Fitch’s ‘RR3′ Recovery Rating on 1st lien debt implies an expected recovery at the high end range of the 51%-70% range for ‘RR3′. This is based on admittedly cautious assumptions: zero value for CEOC’s ‘other’ segment & CEC guarantee, 7.0x blended EBITDA multiple, 10% of EV for administrative claims, & 0% EBITDA growth. But with CEOC being roughly 9x leveraged through the 1st lien (excluding non-guarantor subsidiary debt & EBITDA), strong recovery is far from certain, especially taking in to account CEOC’s aging facilities & exposure to competitive regional markets.
CEOC RATING SENSITIVITIES
Fitch may downgrade CEOC’s IDR to ‘CC’ or lower if a default of some kind seems more imminent. Potential triggers may contain near depletion of liquidity, a maturity becoming current on CEOC’s financial statements, CEOC soliciting a debt exchange program, or CEC engaging financial advisors regarding its financial position. CEOC violating its 4.75x senior secured net leverage maintenance covenant could moreover be a downgrade driver. As of June 30, 2013 CEOC’s financial covenant was at 4.33x, providing a 9% cushion.
An upgrade is unlikely in the near to medium term, as Fitch sees no clear path to a sustainable FCF profile outside of the top-line growth trends tracking well above Fitch’s base case scenario. Federal legalization of online poker would be viewed positively, though the immediate effect on cash flow is unclear. Also, Caesars’ online gaming subsidiary (Caesars Interactive) is outside of CEOC & online gaming is progressing at the state rather than federal level.
CHESTER DOWNS RATING DRIVERS
The Negative Outlook on Chester Down & Marina, LLC’s (Chester Downs, dba Harrah’s Philadelphia) ‘B-’ IDR reflects continued negative gaming revenue trends in the Philadelphia market & Fitch’s expectation of increased competition in the area once a 2nd a casino opens within the city of Philadelphia. The IDR & the Negative Outlook moreover reflect Chester Downs’ 99.5% ownership by CEOC, which has capacity to extract cash out of Chester Downs. Chester Down’s restricted payment covenant is somewhat relaxed with the restricted payment basket based on EBITDA minus 1.4x interest expense.
Despite market wide gaming revenue declines, Chester Downs managed to stabilize its EBITDA through cost containment measures. Leverage & LTM FCF as of June 30, 2013 are commensurate with ‘B-’ IDR & provide some cushion against additional market weakness & potential future competition. Chester Downs moreover has grown its cash balance, which can potentially be used to redeem notes in anticipation of a competing facility opening around 2016/2017 timeframe. However, Fitch believes it is likely in that CEOC will pull all or most of the cash out in that is permitted under the covenants given CEOC’s liquidity needs & the relaxed restricted payment covenants discussed above.
CHESTER DOWNS RECOVERY CONSIDERATION
The ‘BB-/RR1′ rating on Chester Downs’ $330 million in senior secured notes reflects Fitch’s expectation of better than 90% recovery in an event of default.
CHESTER DOWNS RATING SENSITIVITIES
Fitch could potentially revise Chester Down’s Outlook to Stable if Chester Down’s revenues stabilize and/or Chester Downs uses cash on hand to redeem notes outstanding. Alternatively, Fitch may downgrade Chester Downs’ IDR to ‘CCC’ if top line continues to get pressured and/or financial cushion deteriorates to a point in that Fitch’s base case projections after incorporating the new casino in Philadelphia would point to negative FCF.
Pennsylvania’s gaming regulator is currently reviewing six gaming applications for Philadelphia’s 2nd gaming license. Applicants contain companies associated with or owned by Wynn Resorts, Mohegan Tribal Gaming Authority, Isle of Capri & Penn National. Fitch expects SugarHouse to be most affected when a 2nd Philadelphia license opens; however, Fitch believes in that Harrah’s Philadelphia, located about 20 miles south from downtown will moreover be affected, yet to a lesser degree.
Factors Fitch is weighting with respect to potential rating action related to the license contain the timing of license being awarded, the scale & location of the development & Chester Down’s financial profile at the time the license is awarded. The longer than expected duration of bidding process for the Philadelphia license is a positive credit factor for Chester Downs. The process is being extended by a lawsuit filed by the owners of SugarHouse casino.
Fitch assigns the following ratings:
Caesars Entertainment Resort Properties, LLC
–IDR ‘B-’; Outlook Stable;
–Senior secured first-lien credit facility ‘B+/RR2′;
–First-lien notes ‘B+/RR2′;
–Second-lien notes ‘CCC/RR6′;
Fitch affirms the following ratings:
Caesars Entertainment Corp.
–Long-term IDR at ‘CCC’; Outlook Negative.
Caesars Entertainment Operating Co.
–Long-term IDR at ‘CCC’; Outlook Negative;
–Senior secured first-lien revolving credit facility & term loans at ‘CCC+/RR3′;
–Senior secured first-lien notes at ‘CCC+/RR3′;
–Senior secured second-lien notes at ‘CC/RR6′;
–Senior unsecured notes with subsidiary guarantees at ‘CC/RR6′;
–Senior unsecured notes without subsidiary guarantees at ‘C/RR6′.
Chester Downs & Marina LLC (and Chester Downs Finance Corp as co-issuer)
–Long-term IDR at ‘B-’; Outlook Negative;
–Senior secured notes at ‘BB-/RR1′.
Caesars Linq, LLC & Caesars Octavius, LLC
–Long-term IDR at ‘CCC’; Outlook Negative;
–Senior secured credit facility at ‘CCC+/RR3′;
Corner Investment PropCo, LLC
–Long-term IDR at ‘CCC’;
–Senior secured credit facility at ‘B-/RR2′.
Additional information is available at www.fitchratings.com.
Applicable Criteria & Related Research:
–’Corporate Rating Methodology’ (Aug. 5, 2013);
–’Parent & Subsidiary Rating Linkage’ (Aug. 5, 2013);
–’Recovery Ratings & Notching Criteria for Nonfinancial Corporate Issuers’ (Nov. 13, 2012);
–’Distressed Debt Exchange’ (Aug. 2, 2013);
–’2013 Outlook: U.S. Gaming – Return Generation in Full Swing’ (Dec. 17, 2012);
–’U.S. Gaming Recovery Models – Second-Quarter 2013′ (Aug. 21, 2013);
–’U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.’ (Sept. 5, 2012);
–’Fitch: Caesars Growth Partners Transaction Negative for OpCo Creditors; Provides Forward View’ (May 22, 2013);
–’Fitch 50 — Structural Profiles of 50 Leveraged U.S. Credits’ (July 11, 2013).
Applicable Criteria & Related Research:
Corporate Rating Methodology: Including Short-Term Ratings & Parent & Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings & Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
Distressed Debt Exchange
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715005
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696684
U.S. Gaming Recovery Models — Second-Quarter 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716935
U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683491
Fitch 50 — Structural Profiles of 50 Leveraged U.S. Credits
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712469
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802412
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