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The Deal: Caesars Launches Massive Refinancing

He believes Caesars needs to shed all but the bank debt in its OpCo unit.

The bondholder expects that Caesars will do what it can to reduce debt outside of court, but he thinks a Chapter 11 bankruptcy--ideally a prepackaged agreement--is inevitable.

"It's just a lot of debt," he said, explaining, "You need to run this through a Chapter 11 process just to clean up the holdouts."

Disputes between different classes of bondholders with disparate recovery expectations are likely to scuttle the chances of an out-of-court solution, the bondholder explained.

Beyond the usual creditor class disputes, Caesars also has a problematic contingent of basis traders that have no incentive to take a haircut, the source noted.

These basis traders have hedged their bets by holding both second-lien debt and credit default swaps that insure them against the non-payment of their second-lien debt. Essentially, they are arbitraging what they believe is a mispricing of similar securities by taking opposing short and long positions with the expectation that their values will converge.

For now, Caesars has breathing room until some of its unsecured debt matures in 2015. The company may want to restructure that debt or even work out a comprehensive restructuring before then in order to avoid paying par for the unsecured notes.

The bondholder believes Caesars and its private equity owners, Apollo Global Management and TPG Capital, will want to take care of one particular detail before undertaking a bankruptcy filing--the parent company's guarantees on the operating company's shaky debt.

Caesars hived off some of its most attractive assets into a new unit, Caesars Growth Properties, in a move to protect its crown jewels. That protection, however, depends on the health of the ultimate parent company, Caesars Entertainment Corp.

The parent's health is threatened because it still guarantees the operating company's debt.

"You've created a good amount of value with [Caesars Growth Partners] and PropCo [the property company]. Now how do you keep the value in the parent from getting sucked down into the OpCo [Caesars Operating Co.]?" the bondholder asked. "You get rid of the parent guarantees."
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