Credit-default swaps buyers hobble Caesars’ turnaround effort


NEW YORK — Caesars Entertainment’s ability to negotiate a debt exchange that keeps it out of bankruptcy is being complicated by a surge in credit-default swaps that would be profitable if the casino operator defaults.

The net amount of outstanding contracts on Caesars debt surged to $2.14 billion on June 13, the most since November 2008, according to Depository Trust & Clearing Corp. data compiled by Bloomberg. Outstanding derivatives have climbed 50 percent from a year ago as prices on shorter-dated swaps surged, indicating traders are putting on more wagers that the company will fail within 12 months.

The derivatives, which can be used to hedge against losses or to speculate on credit-worthiness, may be a sign that some bondholders are also buying contracts and may profit more from a default than avoiding one. Caesars, taken private in 2008 by Apollo Global Management LLC and TPG Capital for $30.7 billion, has been clashing with its creditors in a saga that may presage a broader restructuring of its unsustainable debt load.

“It makes it harder for Caesars to coerce an exchange on their terms,” Chris Snow, an analyst at debt-research firm CreditSights Inc. in New York, said in a telephone interview. “You can be short the company through the CDS, and not be interested in a proactive restructuring of the debt that benefits the company.”

Investors who want to protect Caesars debt from default for a year had to pay 32.8 percentage points upfront on June 25, compared with 5.75 percentage points in May, according to data compiled by CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. That means it costs $3.28 million initially to protect $10 million of debt for a year.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

We won’t “be held hostage by speculators betting against the long-term health of the enterprise,” Stephen Cohen, a spokesman for Caesars at Teneo Holdings LLC in New York, said in an e-mail. “Speculators who hold credit default swaps have incentives to make claims of default. Those incentives are impediments to rational transactions. We have done dozens of deals with responsible creditors who want to see the company succeed.”

TRADING ON NOTES

Caesars’ $1.5 billion of 9 percent first-lien notes due 2020 traded at 84 cents on the dollar Monday to yield 13.1 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

in May, Caesars sold a 5 percent stake in Caesars Entertainment Operating Co., its largest and most-indebted subsidiary, to outside investors for $6 million.

The company said that allowed it to remove a guarantee on about $14 billion of the operating unit’s debt, a move analysts said weakens creditors’ negotiating power in a restructuring because they no longer have a claim on the parent company’s assets. Caesars also transferred assets, including Bally’s, Quad (which is being renamed the Linq Hotel) and Cromwell casino-hotels in Las Vegas, to an affiliate.

Two separate creditor groups have objected to the company’s actions, with one sending Caesars a notice of default on June 5. Those bondholders include David Tepper’s Appaloosa Management LP, Oaktree Capital Group LLC and Canyon Capital Advisors LLC, a person with knowledge of the default notice who was not authorized to speak publicly said last month.

A first-lien group of creditors has also sent a letter alleging improper transfer of assets, according to an April 4 regulatory filing. That set is represented by Kramer Levin Naftalis & Frankel LLP, according to another person with knowledge of the matter, who asked not to be identified, citing lack of authorization to speak publicly.

Phillipa Yule, a spokeswoman for Kramer Levin, declined to comment.

GRAPPLING WITH A DEBT LOAD

Caesars completed an initial public offering in 2010, raising $16.3 million that gave the company a market value of $1.13 billion. Shares closed at $18.15 on Wednesday, down from a high of $26.47 in March.

Caesars, which reported a widening $386.4 million loss for the three months through March, has been grappling with its debt load with U.S. consumers restraining discretionary spending since its buyout.

The International Swaps and Derivatives Association, a group of banks and investors that governs the CDS market, hasn’t been called on to rule on a potential credit event.

“Caesars is thinking it is coming from a position of strength because there’s no parent guarantee anymore,” Alex Bumazhny, an analyst at Fitch Ratings, said in a telephone interview. “But some of the creditors I would guess are less fearful of a bankruptcy situation.”

 

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