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The Deal: Caesars Plummets Amid Fears of Bankruptcy

Caesars did take some positive steps toward debt extinguishment in the second quarter ending June 30, by raising capital to repurchase some of its debt at a discount. The company paid $183.7 million for $225 million of its commercial mortgage-backed security loans, and $40.9 million for $51.2 million of its second-lien senior debt due 2018 held by its operating company.

However, the hedge fund investor said that he was confused by the company's decision to buy back notes due in 2018 alongside debt held in the property-owning unit.

"It makes a lot of sense for them to buy back the PropCo debt at a discount--what doesn't make sense is for them to buy back their operating company paper," the investor said. "They'd have to buy back billions of that to move the needle, and the company can't buy back all of that given where it's trading--they're way too under water."

The investor characterized the buyback of notes due in 2018 as a "waste of money."

Because the debt load is so large, "you can't just buy up the debt and turn it into equity," the hedge fund investor said, adding, "I think this is totally terminal. I have them running out of cash sometime in 2014 or early 2015."

However, that assumes that Caesars' debt covenants would not allow it to issue another $1 billion of first-lien secured debt, a matter that is a point of contention among investors and analysts, the investor said, adding that selling assets or downstreaming cash from the parent company could keep the company alive for longer.

"We're always evaluating options with respect to our balance sheet," Caesars spokesman Gary Thompson said in an e-mail statement Tuesday. "We balance investing in growth opportunities with repurchasing debt and maintaining liquidity. When we do elect to buy back debt, we evaluate current market pricing and other factors and elect which piece of debt best fits our objectives."

Caesars has $215 million in second-lien notes held by its operating subsidiary, Caesars Entertainment Operating, and $792 million in unsecured notes held by the operating company and itself coming due in 2015. In addition, another $1.05 billion in unsecured debt comes due in 2016, according to a July 11 report from Fitch Ratings Inc.
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