Caesars faces fresh debt downgrade on $2.2 bln unit sale

  • Moody’s reviewing Caesars debt for downgrade
  • Currently assigned fourth-lowest rating
  • Deal raises cash but divests healthier casinos

As target of one of the largest LBOs of all time and the biggest owner of casinos in the United States, Caesars has been unable to free itself from a hefty debt load of nearly $21 billion stemming from its buyout in 2008 by affiliates of Apollo Global Management and TPG.

Caesars Entertainment agreed to sell Bally’s Las Vegas, The Cromwell in Las Vegas, the Quad in Las Vegas and Harrah’s New Orleans to Caesars Growth Partners LLC, a joint venture with Caesars Acquisition Company in which Caesars Entertainment holds a 58 percent economic interest.

Breaking out debt assumption of $185 million and committed project capital expenditures of $223 million, proceeds will total $1.8 billion when the deal closes as expected in the second quarter.

“The sale will provide (Caesars Entertainment) with needed liquidity to fund operating losses, however, the loss of EBITDA, from four properties, including three located in the better-performing Las Vegas market, is negative for (Caesars Entertainment’s) overall credit profile,” Moody’s analyst Peggy Holloway wrote in a note to clients.

The sale marks what could be a series of steps to address Caesars Entertainment’s capital structure that will include repayment of a yet-to-be determined amount of bank debt and could include repurchase of existing debt at a discount.

”Given (Caesars Entertainment’s) total debt load of nearly $21 billion, there would need to be a material amount (of) debt reduction to offset the loss of EBITDA and simultaneously reduce (Caesars Entertainment’s) high leverage and operating losses,” Moody’s said.

The debt rating agency will review Caesars Entertainment for a downgrade, weighing the ultimate use of proceeds, the company’s liquidity profile, and management’s strategy for restructuring its heavy debt load.

Caesars Entertainment may attempt to remove the parent guarantee, as well as the service agreement among various entities.

Moody’s corporate family rating for Caesars Entertainment now stands at Caa2, with its probability of default rating at Caa2-PD. The rating reflects the view that the debt is “speculative of poor standing” and “subject to a very high credit risk,” according to Moody’s ratings definitions. Only three ratings are lower for Moody’s: Caa3, Ca and C.

In a prepared statement, Caesars Entertainment CEO Gary Loveman said the company has faced ”an incredibly challenging business environment and a highly leveraged capital structure” since it went private near the beginning of the financial crisis.

”Despite these obstacles, we have invested significantly in the growth of our network and the enhancement of our assets while concurrently deploying a wide array of financial and operational tools to manage the company’s capital structure and create value,” he said.

With a market cap of about $3.5 billion, the company includes three structures: Caesars Entertainment Resort Properties, its interest in Caesars Growth Partners and Caesars Entertainment.