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Vegas showdown

22 December 2014 By Quentin Webb

The ill-fated 2008 buyout of Caesars has pitted plenty of high finance’s high rollers against one another. Despite a couple of breakthroughs, Wall Street’s poker game over the casino group isn’t quite over.

Things are moving fast. On Friday a steering committee of senior bondholders gave its backing to a restructuring that would slash some $10 billion of debt from Caesars Operating Co (CEOC), the empire’s biggest unit. The division would be split into an operating and a property company, the firm said. Then on Monday, CEOC’s parent, publicly traded Caesars Entertainment Co (CEC), bought another affiliate, Caesars Acquisition Co, for $1.2 billion. Among other things, the company said that deal would help fund CEOC’s restructuring.

Something had to give: CEOC optimistically targets $1 billion of EBITDA next year. It currently has 18 times that in liabilities, which is clearly unsustainable, and had already skipped a payment on junior debt.

But players like Apollo, Blackstone and Elliott hold conflicting hands. A deal needs backing from two-thirds of first-lien bondholders and bank lenders. The latter are in no rush, because their debt still has an undisputed guarantee from less-indebted listed parent CEC.

Derivatives make this more complicated. Some bondholders, like Elliott, own credit default swaps that pay if CEOC defaults. Conversely, some lenders, which may include BlackRock and Blackstone’s GSO, sold CDS.

The overall valuation math could prompt bondholders and even bank lenders to revolt. Earlier draft proposals suggested first-lien bonds would effectively receive 93.8 cents on the dollar. But the securities have been trading roughly 20 points cheaper.

Investors worry the new debt and shares will be worth less than CEOC says – especially since the new property company will be highly indebted. The steering committee only represents 38 percent of first-lien bonds, half of what’s needed for a deal.

Junior bondholders, meanwhile, are way out of the money – and argue buyout architects Apollo and TPG spirited assets out of CEOC through “fraudulent transfers.” Chapter 11 shields companies from lawsuits but that isn’t necessarily watertight here, as entities like CEC won’t be filing for bankruptcy. These angry investors have one card left: continue litigating. That may keep players at the table for some time.

 

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