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Caesars Makes Another Move to Insulate Healthy Subsidiaries

NEW YORK (The Deal) -- Las Vegas-based casino operator Caesars Entertainment (CZR - Get Report) has taken another step to protect its healthier subsidiaries from a potential bankruptcy filing at the debt-laden operating unit.

A May 21 regulatory filing revealed the terms of a new shared-services agreement that transfers ownership of intellectual property and popular loyalty rewards programs that were previously wholly-owned by the troubled operating unit, Caesars Entertainment Operating Co. (CEOC), into a new joint venture controlled by CEOC, Caesars Entertainment Resort Properties LLC (CERP), and a vehicle created last year, Caesars Growth Partners Holdings LLC (CGPH).

The JV, called Caesars Enterprise Services LLC, will be majority-owned by CEOC (69%), while CERP will hold 20.2% and CGP will hold 10.8%. All the parties, however, will have equal voting rights, with some veto privileges afforded to CEOC.

"The implicit rationale seems to be an attempt to shield CERP and CGPH from a CEOC bankruptcy," CreditSights Inc. analysts said in a May 21 report.

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CreditSights analyst Christopher Snow said by phone on Thursday that he doesn't think the agreement is designed to create opportunities to strip CEOC of its rights to use the intellectual property and loyalty programs, but rather to protect CERP and CGPH's rights to use them in case of a bankruptcy.

The provisions of the agreement state that if any member of Caesars Enterprise Services files for bankruptcy, it will lose its "governance rights" in the JV.

If CEOC filed for bankruptcy, for example, it would still have rights to the intellectual property, but it would lose the ability to control how its JV partners used it royalty-free, as CreditSights understands it.

The May 21 report calls this provision "absurd."

If CEOC's creditors were to take control of the unit during a bankruptcy restructuring, this JV agreement would prevent the creditors from trying to cordon off the IP and rewards program within CEOC, Snow said.

"The bondholders in the CEOC structure are going to litigate on a lot of grounds," Snow said, citing concerns that asset transfers out of CEOC constitute fraudulent conveyance, and also that the recent cancellation of the parent company's guarantee of CEOC's debt wasn't permissible under certain bond indentures.

"This [shared-services] contract is also going to be litigated," he said, concluding, ""I think this is going to get tied up with everything in the [potential] bankruptcy."

Caesars and its private equity sponsors, Apollo Global Management LLC and TPG Capital LP, have been working to revamp Caesars Entertainment's capital structure, creating new business units, selling assets between units, and refinancing debt to push back maturities.

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