Caesars sweetens deal for bond, loan investors

Thu Sep 26, 2013 9:17pm BST

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NEW YORK, Sept 26 (IFR) - Debt-laden casino operator Caesars has had to sweeten the terms of its new USD4.85bn bond and loan package to whet investor appetite for the highly leveraged and complex debt deal.

The original issue discount (OID) on the loan has been widened slightly to 98 from 99, while price talk on the two-tranche high-yield bond is coming wider than some market participants had expected.

Caesars has also rejigged the overall shape of the package, with the loan reduced by at least USD500m and the first lien bond expected to be increased by a similar amount.

This bucks the trend of recent jumbo deals for Dell and Hilton, which funded their financings at significantly lower costs than expected thanks to strong demand for their leveraged loans.

Several market participants said the new Caesars deals, expected to price by the end of the week, are particularly aggressive - and could only get past the post in the current red-hot market climate.

The company's USD21.1 billion debt pile, a leftover from its 2008 leveraged buyout by private equity firms Texas Pacific and Apollo, is a concern for the market - as is the widely held view that the existing opco debt will eventually have to be restructured.

"If things don't improve much better than their case suggests, a bankruptcy filing could happen in 2014 at the opco level," said Alex Bumazhny, a gaming analyst for Fitch ratings.

But others say even that worry will not prevent the trades from being sold - and that Caesars has a track record of getting deals done in the capital markets.

"People ask me why is it that this company has not gone into bankruptcy," Barbara Cappaert, credit strategist at KDP Investment Advisors, told IFR.

"And really one of the major reasons why is because of its ability to play the market better than any other company I know."

COMPLEX STRUCTURE

To be sure, some investors have stayed away because of the unusually complicated capital structure, which includes propco, holdco and opco debt as well as a new Growth Partners entity.

The new leveraged loans and high-yield bonds will be issued out of a propco - Caesars Entertainment Resort Properties (CERP) - and will refinance existing CMBS and mezzanine loans.

The first lien seven-year non-call three senior secured bond has been increased to USD1bn-USD1.5bn, at least twice the size of the originally targeted USD500m issue, while price talk has been set at 7.25%-7.5% versus whispers heard at 7.25%.

Meanwhile the second lien eight-year non-call three senior secured notes have been slightly downsized to USD1.25bn from USD1.35bn, with price talk set at 10.25%-10.5% - around 100bp wider than where whispers were heard earlier this week.

The size of the loan has been reduced from USD3bn to a range of USD2bn to USD2.5bn, and price talk set at LIB+550 with a 1 percent Libor floor.

The first lien bonds are considered the most attractive from the point of view of both pricing and credit, taking leverage multiples and enterprise value into account.

"Unlike competitors such as MGM, Caesars has less exposure to the booming Asian gaming industry," said Andrey Kuznetsov, a credit analyst at Hermes Fund Managers.

"That means that its enterprise value is more in the region of eight-times Ebitda."

Taking the last 12 months' Ebitda value of USD486m, leverage on the first and second lien bonds is around 7.2x and 10.3x respectively.

In the event of a restructuring, the high leverage on the second lien bonds means that they are more at risk of losses. Those bonds are also likely to be more volatile.

"If there is a restructuring, or disruption at the opco level, that would increase market volatility around the second lien bonds," said Kuznetsov.

The bond is expected to price on Friday via left lead Citi, BofA Merrill, Credit Suisse, Deutsche Bank, JP Morgan, Goldman Sachs, Macquarie, Morgan Stanley and UBS. The first-lien term loan commitments are due by noon Friday, with pricing expected thereafter. (Reporting by Natalie Harrison and Rachelle Kakouris, IFR Markets; Additional reporting by Danielle Robinson; Editing by Marc Carnegie)

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