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Caesars Restructuring Enters New Phase

NEW YORK (The Deal) -- Speculation about Caesars Entertainment's (CZR - Get Report) next step in managing its $23.85 billion debt load is intensifying, and sources suspect that the private equity-backed casino giant may move to eliminate the second-lien notes at its operating subsidiary in the coming months.

One hedge fund manager who holds Caesars' debt has a cynical take on reports that the Las Vegas-based company is working with advisers from Lazard on initiatives to revamp its capital structure, including moving assets from the beleaguered operating subsidiary, Caesars Entertainment Operating Co. (CEOC), to the healthier Caesars Growth Partners unit.

The investor, who asked not to be named, believes that Caesars is looking at more than just ways to siphon off assets.

"They're trying to figure out how best to screw the second-lien noteholders [at the operating company level]," he suggested. There is about $5.5 billion in second-lien debt at CEOC.

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One restructuring adviser who follows the Caesars debt debate had a more charitable take on the fate of second-lien noteholders.

"Conventional wisdom is that there's some type of equity exchange offer coming down the pike to give second-lien holders an opportunity to participate in the equity value [at the parent company level]," said the adviser, who also asked not to be named.

The restructuring adviser suspects Caesars will pursue an exchange offer for second-lien notes that would either buy up their debt at a discount, offer them equity in the parent company, or give them convertible securities at the parent company level, which would be less dilutive than pure equity.

Those options would "give [second-lien noteholders] some of that upside they're looking for, even if they take an impairment [in the debt exchange]," the adviser said.

Caesars can turn to private equity backers Apollo Global Management LLC and TPG for advice as it considers the best strategy.

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