Caesars fighting back against claims
Disgruntled bondholders holding around 30 percent of second-lien, 10 percent ponds in Caesars Entertainment Operating Company sent the operator a notice of default, claiming the operator, saddled with $23.4 billion in debt, was actually in default when it created the new publicly listed Caesars Growth Partners in a move to generate money to pay interest on the debt.
The creditors say the company defaulted on its obligations and violated the terms of their loans this year when it sold Bally’s, the Cromwell, the Quad and Harrah’s New Orleans to Caesars Growth Partners for $2.2 billion. There are $3.7 billion of the notes outstanding, according to a filing.
The transaction was conceived to provide liquidity to Las Vegas-based Caesars, which went private in a 2008 buyout by Apollo Global Management LLC and TPG Capital, and some of its creditors.
Caesars is fighting back by publicly defending the transaction. “We will not allow our company, our employees and the communities in which we operate to be held hostage by a minority of holders whose interests are contrary to the long-term health of the company,” Gary Loveman, chairman and chief executive officer of Caesars, said in the filing.
According to a Bloomberg report, the creditors’ action was designed to notify Caesars that, if their concerns aren’t addressed, they could seek to exercise remedies under the loan documents such as filing for receivership, forcing an involuntary bankruptcy proceeding or foreclosing on the debt.
“Although the indenture allows 30 percent of the holders of a relevant issue to give notice of defaults, the notice delivered yesterday was given by holders of more than 50 percent of the largest issue of Caesars Entertainment Operating Co. second-lien notes,” Bruce Bennett, an attorney for the bondholders at Jones Day in Los Angeles, said in a statement.
Caesars last month sold a 5 percent stake in Caesars Entertainment Operating Co. to outside investors for $6 million, and removed a guarantee to bondholders that weakened the negotiating position of the bondholders, according to some analysts. The second-lien bondholders are criticizing that maneuver as a way to hold off repayment.
Caesars Entertainment shares fell 3 percent to $17.91 on news of the creditor notice, continuing a slide that has seen Caesars shares drop 17 percent this year. The operating unit’s 10 percent, second-lien debt traded at 42.5 cents on the dollar last week in New York, prior to the filing, according to the Bloomberg report. The unit’s $1.5 billion of 9 percent, first-lien bonds dropped 0.5 cent on the dollar to 84 cents, according to Trace.
The filing named 13 investors, including Appaloosa Management LP, Oaktree Capital Group LLC, Canyon Capital Advisors LLC, Caspian Capital LP and Contrarian Capital Management LLC, according to an unnamed source in the Bloomberg story.
“Bondholders are fighting back with whatever they can in order to better position themselves in an inevitable debt restructuring,” Barbara Cappaert, an analyst at KDP Investment Advisors Inc., wrote in a report. “Clearly the wheels are in motion for restructuring talks, even if they are starting out on a contentious note.”
Analyst Sammy Pollack of Zacks Investment Research issued a report recommending a “Strong Sell” on Caesars Entertainment stock (CZR), while saying the outlook for related entities such as Caesars Acquisition Group (CACQ) are much better.
“It is difficult to see how CZR is a good investment,” Pollack wrote in the report. “I find it difficult to make the bull case for CZR shares. Simply put, CZR has too much debt to survive in its current form. Moody’s has said that a restructuring is inevitable. If Apollo is successful in moving assets around within the different CZR associated companies, it probably will not benefit CZR but rather the new companies that are buying the assets at a cheap price.
“Under the right circumstances, CACQ might be a good investment. Unlike CZR, I believe there is a bull case to be made for CACQ. In some ways, CZR’s pain is CACQ’s gain as the company is able to accumulate good assets at good prices. However, it must be acknowledged that it is unclear whether Apollo will be able to continue its plan to transfer assets from CZR to CACQ. Bondholders appear willing to use the court system to block such transactions.”
