Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Caesars Entertainment Operating Company (CEOC) to 'C' from 'CC', CEOC's credit facility to 'CCC/RR1' from 'CCC+/RR1' and the first lien notes to 'CCC-/RR2' from 'CCC/RR2'. CEOC's second-lien and unsecured notes were affirmed at 'C/RR6'. Fitch also affirmed the IDRs of Caesars Entertainment Corp (CEC) and all the issuing subsidiaries except CEOC. Full list of rating actions follows at the end of the release.
The downgrade of the IDR to 'C' reflects CEOC's missed $223 million interest payment to the holders of the 10% second lien notes that was due December 15. CEOC has a 30-day grace period before the missed payment is considered a default per the 10% notes' indentures. There is $4.5 billion of the 10% notes outstanding and CEOC had about $1.3 billion of cash net of estimated cage cash ($180 million) as of Sept. 30, 2014. If the missed interest payment becomes a default, CEOC will default on its senior secured credit facility credit agreement, with the remaining debt in the capital structure defaulting only if the 10% noteholders accelerate.
Regardless of whether the second lien interest payment is made Fitch believes that a default of some sort is inevitable as the company disclosed in its third quarter 2014 (3Q'14) 10Q that it will run out of liquidity by 4Q'15.
CEC and CEOC were negotiating restructuring terms with the first-lien lenders and noteholders. On December 12, CEOC's credit facility lenders let their non-disclosure agreement expire and made their restructuring documents public. Based on the documents released by the lenders and another set of documents disclosed by a single first-lien bondholder the restructuring talks have contemplated a REIT spin-off and a pre-packaged bankruptcy. Per CEOC's disclosure the company is still negotiating the restructuring terms with the CEOC's first-lien noteholders.
The 'CC' IDR of CEC continues to reflect the linkage between CEC and CEOC vis-a-vis CEC's collection guarantee of CEOC's credit facility and the possibility that CEC will be liable under the payment guarantee of CEOC's notes. CEOC released the guarantee in May 2014; however, the first-lien and second-lien noteholders are contesting the release.
CEOC related risks are factored into the 'B-' IDRs of Caesars Entertainment Resort Properties (CERP) and Caesars Growth Properties Holdings (CGPH); however, the IDRs are not directly linked to CEOC's IDR. The main CEOC related risk is the possibility that CEOC's creditors complaints result in certain asset sales and transfers to CGPH and/or CERP from CEOC being considered improper (i.e. fraudulent transfers). Also there is a chance that CERP's and CGPH's access to the Total Rewards loyalty program is somehow disrupted, although this risk is somewhat mitigated with the creation of the shared services entity.
Fitch does not believe that a bankruptcy at CEOC will pull CGPH (including Cromwell) or CERP subsidiaries into the insolvency proceedings as these entities remain solvent in Fitch's opinion. Chester Downs' solvency is more debatable; however, the risk of it being pulled into bankruptcy is already reflected in its 'CCC' IDR.
Recovery Analysis
Fitch estimates full recovery for CEOC's credit facility lenders, 87% recovery for the first-lien noteholders and less than 10% recovery for the remainder of the capital structure. The 87% recovery for the first-lien notes is an upward revision from 80% Fitch estimated when it released its 3Q'14 gaming issuer recovery models on December 10. The revision reflects a positive change in the cash assumption since CEOC skipped the second-lien interest payment.
Fitch's recovery analysis for CEOC assumes administrative claims at 10% of enterprise value, which is a standard assumption Fitch uses. Under this assumption administrative claims are approximately $800 million, which is high but not unprecedented. Lehman and Enron liquidation legal and professional fees exceeded $2 billion and $750 million, respectively. The more comparable sized Tribune Co.'s bankruptcy cost more than $500 million. Changing the administrative claims to 5% of enterprise value (EV) brings the claims down to roughly $400 million, improving the first-lien notes' recovery to 93%, which is in-line with an 'RR1' recovery rating.
More details around the assumptions are included in Fitch's press release from December 10, entitled 'Fitch: 80% Recovery Estimated for Caesars OpCo 1st Lien Notes' and an interactive excel model 'Updated U.S. Gaming Recovery Models - Third-Quarter 2014'. Fitch updated the model since the original December 10 release to account for change in the cash assumption.
Fitch takes the following rating actions:
Caesars Entertainment Corp.
--Long-term IDR affirmed at 'CC'.
Caesars Entertainment Operating Co.
--Long-term IDR downgraded to 'C' from 'CC';
--Senior secured first-lien revolving credit facility and term loans downgraded to 'CCC/RR1' from 'CCC+/RR1';
--Senior secured first-lien notes downgraded to 'CCC-/RR2' from 'CCC/RR2';
--Senior secured second-lien notes affirmed at 'C/RR6';
--Senior unsecured notes with subsidiary guarantees affirmed at 'C/RR6';
--Senior unsecured notes without subsidiary guarantees affirmed at 'C/RR6'.
Caesars Entertainment Resort Properties, LLC
--IDR affirmed at 'B-'; Outlook Stable;
--Senior secured first-lien credit facility affirmed at 'B+/RR2';
--First-lien notes affirmed at 'B+/RR2';
--Second-lien notes affirmed at 'CCC/RR6'.
Caesars Growth Properties Holdings, LLC
--IDR affirmed at 'B-'; Outlook Stable;
--Senior secured first-lien credit facility affirmed at 'BB-/RR1';
--Second-lien notes affirmed at 'B-/RR4'.
Corner Investment PropCo, LLC
--Long-term IDR affirmed at 'CCC';
--Senior secured credit facility affirmed at 'B-/RR2'.
Chester Downs and Marina LLC (and Chester Downs Finance Corp as co-issuer)
--Long-term IDR affirmed at 'CCC';
--Senior secured notes affirmed at 'CCC+/RR3'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 18, 2014);
--'Updated U.S. Gaming Recovery Models - Third-Quarter 2014' (Dec. 16, 2014);
--'Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)' (July 8, 2014);
--' Fitch: 80% Recovery Estimated for Caesars OpCo 1st Lien Notes' (Dec. 10, 2014);
--'Fitch: Caesars REIT Plan Good for Recovery, Ch. 11 Still Likely' (Nov. 21, 2014).
Applicable Criteria and Related Research: U.S. Gaming Recovery Models (Third Quarter 2014)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=841628
U.S. Gaming Recovery Models - Third-Quarter 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=837188
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813588
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=953215
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