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Caesars bonds tumble on plan to shift assets


LOS ANGELES — Bondholders are growing disenchanted with Caesars Entertainment Corp. as it shifts assets, including an Internet gaming unit, away from them to benefit shareholders led by Apollo Global Management and TPG Capital.

Bonds of the largest U.S. casino owner dropped the most among domestic companies in the Bank of America Merrill Lynch High Yield Gaming Index, falling 1.2 percent through Aug. 15 from July 9, the day before Las Vegas-based Caesars announced details of plans to let shareholders buy into a new unit that will own part of its interactive business and other divisions. The shares climbed 25 percent through Aug. 16, compared with a gain of 11 percent at MGM Resorts International and 6 percent for Las Vegas Sands Corp.

The transaction may distance the assets from bondholders in case of a bankruptcy, preserving the private-equity firms’ interests in the units. Apollo and TPG, which acquired Caesars in 2008 for $30.1 billion and still hold about 70 percent, plan to exercise at least $500 million of their rights in the $1.18 billion offering, according to a July 10 regulatory filing

“The crown jewel is getting moved into a place where it’s less likely the bonds are going to get it and more likely the equity will get it,” Kim Noland, director of high yield research at Gimme Credit, said in a telephone interview from New York. “We don’t know how big the crown jewel is and how long it’s going to take to get that big.”

Gary Thompson, a company spokesman, didn’t respond to a request for comment about the transaction’s effect on bondholders.

Lenders may be able to exercise control over the units involved in the spinoff in a default, according to the regulatory filing.

Caesars’ $364.5 million of 5.625 percent senior unsecured bonds due in June 2015 and rated Ca by Moody’s Investors Service and CCC- at Standard & Poor’s traded at 81 cents on the dollar on Aug. 9 to yield 18.5 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s up from a 9.9 percent yield on Jan. 30, before the spinoff was broached. In that span the yields on all bonds rated CCC and lower fell to 10.18 percent from 10.33 percent, Bank of America Merrill Lynch data show.

Bonds in the S&P CCC category are considered vulnerable to nonpayment, with issuers dependent on favorable conditions to make good on their debt. Moody’s Ca level denotes bonds that are “highly speculative” and “likely in, or very near, default.”

Caesars is awaiting U.S. regulatory approval and can complete the sale in several weeks once it gets the go-ahead, Chairman and Chief Executive Officer Gary Loveman said on a July 29 conference call to discuss second-quarter earnings with analysts and investors.

Stockholders are being offered shares of the new venture, Caesars Acquisition Co., for $9.43 each, according to the filing. It will own all voting rights and just under half of Caesars Growth Partners LLC, a venture with the parent company.

With proceeds from the deal, Caesars Growth Partners will acquire the Planet Hollywood Resort & Casino in Las Vegas and a future Baltimore casino from the parent for $360 million and the assumption of $514.6 million in debt.

Caesars Entertainment will contribute the online unit Caesars Interactive, which it will continue to run, and bonds valued at $750 million. The parent company will keep about 57 percent of Caesars Growth Partners, depending on the level of participation by outside shareholders.

Caesars stock has more than doubled this year.

The formation of Caesars Growth Partners will raise cash for the parent and provide the venture with funds for growth while allowing Caesars Entertainment to retain an interest, Loveman said on a May 1 teleconference to discuss first-quarter results with analysts and investors.

“The transaction is an important step in our ongoing efforts to strengthen our balance sheet, and it positions the company to continue making strategic investments to support our future growth,” he said.

Starting three years from completion of the offering, Caesars Entertainment has the option of reacquiring the Caesars Growth Partners businesses, provided shareholders of the new public company get at least a 10.5 percent annual return.

Sales at the interactive unit, which includes the World Series of Poker tournaments and Slotomania, a popular casinolike game for Facebook.com, rose to $207.7 million last year from $66.5 million in 2011.

The business generated earnings before interest, taxes, depreciation and amortization of $76.2 million in 2012. The company, which plans to offer real money gambling in New Jersey and Nevada as early as this year, is being valued, according to the July 10 filing, at $525 million in the transfer.

Such growth has been hard to come by at Caesars’ casinos. Revenue, at $8.59 billion last year, was 15 percent below 2008, as consumers have cut back on gambling in the recession. Property earnings before interest, taxes, depreciation and amortization of $2.04 billion in 2012 was 16 percent below four years earlier.

Caesars Entertainment has restructured its debt in the years since the buyout, extending maturities and buying back bonds at a discount.

Bond prices also reflect investor concern that the company will pressure creditors into accepting further reductions in their principal or face a bankruptcy filing, according to Chris Snow, an analyst with CreditSights Inc.

The company faces a refinancing hurdle at the end of January 2015, when $4.4 billion of mortgage-backed securities are scheduled to mature, according to filings. Caesars is in talks to refinance those securities, according to Debtwire.

“What this does is, it removes the risk the highly coveted assets like online gaming will be contaminated by a default,” said Alex Bumazhny, an analyst with Fitch Ratings in New York, which rates the company’s debt CCC. “There’s a likelihood these assets won’t be impacted.”

 

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