Caesars’ CEOC Operating Unit Misses $225 Million Bond Payment
Caesars Entertainment Operating Company (CEOC), the largest of three primary operating units of Caesars Entertainment Corp., has announced that it has elected not to pay $225 million in interest due yesterday, December 15th, to second-lien bondholders. The missing of the scheduled debt payments automatically triggers a default within 30 days on the notes, pushing CEOC one step closer to an expected bankruptcy filing in 2015.
The entirety of the $225 million in defaulted debt payments by CEOC was on “second lien” bonds held by investor groups, which were themselves split into several categories:
- $41.3 million due to CEOC’s due to two separate groups of second-lien bondholders in conjunction with a December 2008 indenture those notes, issued at 10%, are due in both 2015 and 2018;
- $184.0 million due to a second and larger group of second-lien bondholders associated with an April 2009 indenture; all of these notes, referred to as “2018 Second Lien Notes(2),” are also due in that year.
According to the filing, the value of the debt associated with the de facto defaulted bonds is about $4.525 billion. The filing states that $825 million in outstanding debt remains associated with the December ’08 indenture, and fully $3.7 billion in debt with the larger April ’09 debt issuance. Caesars continues to battle a lawsuit with creditors involved with 2009 indenture, who have alleged that the company has committed fraud by shuffling most of its debt into the CEOC operating entity while shielding its most valuable assets by transferring them into other holding units. UMB Bank NA holds $1.25 of the defaulted second-lien notes, and is a party to the Delaware lawsuit, which Caesars is battling.
Caesars, in reporting yesterday’s interest nonpayment to the Securities and Exchange Commission (SEC), also stated that it was in ongoing restructuring discussions with a large group of first-lien bondholders, many of whom are also protesting the company’s restructuring proposals.
As a result of the expiration last week of a nondisclosure agreement between Caesars and a large group of first-lien bondholders of CEOC and its parent, CEC, those bondholders released several hundred pages of ongoing business proposals developed by Caesars. In releasing the information, which offers the most complete picture yet made public of the complex Caesars financial structure, the first-lien bondholders attempted to shield themselves from any appearance or association of insider trading with regard to the stock price of Caesars (CZR), which has bounced erratically in the wake of the news but has settled percentage points lower, in addition to a Standard & Poor downgrade.
The first-lien group’s press release states that the group thought they had reached an “oral agreement” with Caesars execs on the basis of the company’s restructuring, which would include CEOC’s expected 2015 Chapter 11 bankruptcy filing. However, in something of a terse acknowledgment that restructuring negotiations with at least some of the first-lien bondholders had reached an impasse, the presser stated, “The First Lien Bank Lenders understand that, at the time of this press release, the Company has not reached an agreement with the First Lien Bondholders on the terms of a Restructuring that are acceptable to the First Lien Bank Lenders, nor has the Company negotiated the details of the definitive documentation relating to such Restructuring or resolved all of the substantive issues with the First Lien Bank Lenders.”
The release also summarized the projections made by Caesars regarding the longer-term finances of the companies. In connection with the embattled and floundering CEOC unit itself, Caesars projected:
- Q4 2014 adjusted EBITDA for CEOC of $224 million, and EBITDA for CEOC of $174 million (after pro forma adjustments for cost savings of $50 million);
- Q4 2014 ending cash balance for CEOC of $1.109 billion, and excess cash balance for CEOC of $809 million (after minimum cash holdbacks of $300 million);
- 2015 EBITDA for CPLV of $260 million;
- Q1 2015 EBITDA for CEOC of $278 million, Q2 2015 EBITDA for CEOC of $247 million and Q3 2015 EBITDA for CEOC of $261 million;
- 2015 EBITDA and 2015 EBITDAR for CEOC of $1.024 billion, respectively;
- 2015 EBITDA margin for CEOC of 21.0% and 2015 year-over-year EBITDA growth for CEOC of 14.1%; and
- 2015 revenue for CEOC of $4.887 billion.
- For purposes of 2015 EBITDA projections for CEOC above, the Company disclosed that it believes that initiatives, which primarily include cost reductions, will increase EBITDA by $198 million.
The first-lien bondholders disclaimed any responsibility for the accuracy or the viability of the projected CEOC numbers, suggesting that some of the bondholders believe that certain of the goals and other market assertions might differ from those offered by Caesars.
The cost-reduction initiatives proposed by CEOC are themselves an eye-opener, indicating a planned trimming of property amenities and employee benefits. Split into three general categories of operations ($100 million in projected cost cutting), marketing ($74 million) and corporate ($24 million), the proposal included the following elements:
- Pay management bonus in CZR stock with CEC cash
- Corporate expense reductions (eliminate and scale back functions)
- Professional service reductions
- Advertising reductions
- Reductions to layered customer reinvestment
- Mail cost savings through shift to email
- Charitable reductions
- Property productivity improvements (scheduling, spans)
- F&B pricing increases
- Increase Caesars Palace occupancy
- Pass on health care increases to employees
- Resort fee price increases and broader application to casino customer base
- Reduction to slot participation fees
- Workers comp reductions
- Retain revenue from closed properties
- Realize growth capital returns
The proposed restructuring of CEOC also included remaking the entity into an UPREIT (“Umbrella Partnership Real Estate Investment Trust”), a tax-friendly structure designed to shield real-estate holdings from tax penalties. Among the hundreds of pages of documents released by the first-lien bondholders is this summary of the planned UPREIT’s primary features, which along with the debt restructuring itself have been referred to by Caesars as “Project Julii”:
- Create an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) structure that is IPO ready
- Contribute ownership of existing gaming properties of CEOC without triggering any current tax
- Avoid SEC registration for the issuance of securities to the Contributors in the Formation Transactions
- To the maximum extent, provide common stock in the REIT (as opposed to OP Units) to the Creditors and Backstop Parties
- Minimize transaction costs
The “Project Julii” documentation also included three scenarios for a “proposed settlement” of existing CEOC debt, that in the wake of the breakdown of negotiations with many of CEOC’s bondholders, now appears to have CEOC headed directly down the road to an inevitable Chapter 11 filing. Scenario #1 was a continuing negotiation and extension of debt, while Scenario #3 (“Fully Consensual”) involved a CEOC filing with the approval of both the first- and second-lien bondholder groups.
Scenario #2, which appears to have been closest to what Caesars execs were negotiating in recent weeks, involved consent with only the primary first-lien bondholders.
A majority of Caesars’ existing corporate debt has been localized under the CEOC entity, which also houses many of Ceasars’ most troubled land-based properties, though not the World Series of Poker brand and associated income streams. The documentation released last week also includes Caesars’ own admission that CEOC in its current state is “over-levered” — its Debt/EBITDA ratio is 17.9/1 — and that, partially attributable to that, the company is hemorrhaging a billion dollars a year in negative cash flow