More than 50% of first-lien bondholders at the operating unit of Caesars Entertainment Corp. (CZR) - Get Caesars Entertainment Corporation Report have signed on to the unit's restructuring plan, according to a first-lien bondholder source.
The support edges the casino operator closer to the 60% threshold it would like to reach before Caesars Entertainment Operating Co. files for Chapter 11 protection.
Meanwhile, a new group of investors who hold nearly $1.6 billion in first-lien debt is working with Debevoise & Plimpton LLP's My Chi To to fight for a sweeter deal for first-lien bondholders.
To said the primary goal of the group is to increase the dollar amount of the recovery for first-lien bondholders, as the group is willing to work within the structure imposed by the restructuring support agreement. Members of the group also hold some first-lien bank debt and second-lien debt, To said.
Private equity-backed Caesars Entertainment has put the fire under holders of CEOC's first-lien bonds to support the plan in the days leading up to the Jan. 15 to 20 window during which the company hopes to file for Chapter 11.
The first-lien bondholder said it should be easier to garner support from a broader base of creditors after CEOC files for bankruptcy, since the source believes credit default swap positions are motivating some investors to try to stave off a restructuring.
Some investors in CEOC's debt hold CDS positions that will only pay out if the casino operator enters bankruptcy later than the planned mid-January filing date. Once a filing occurs, however, those parties' ulterior motives to delay the restructuring process would evaporate, the bondholder said.
CreditSights analyst Chris Snow said that as long as Caesars can get into the high 50% range of support from first-lien bondholders, it would make sense to go ahead and file for Chapter 11 and try to amass more support in bankruptcy court. As Snow sees it, skipping a $225 million debt service payment to second-lien bondholders on Dec. 15 committed Caesars to pursuing the restructuring plan in bankruptcy court.
"The company doesn't have much of a choice," Snow said. "They can't really pay this coupon, and so even if they don't get to the 60% [threshold], this is the best option to have an organized bankruptcy. ... I don't see what their other option is."
For now, the goal is getting more first-lien bondholders on board.
To that end, Caesars said Wednesday that it and certain first-lien bondholders had agreed to amend the term sheet attached to the company's restructuring support agreement. The amendments give a larger piece of the pie to holders who sign on to the plan now; the cash portion of the recovery for all noteholders has been reduced to $207 million from $413 million.
According to analysis by research firm KDP Investment Advisors Inc., the repurposed $206 million has been split into two payout groups designed to smooth the path to restructuring. Half of it would be paid out in the form of a consent fee to bondholders who approve the plan, either when 66.66% of the class signed on or the court approved CEOC's disclosure statement. The other half would be distributed on completion of a preplanned bankruptcy to the consenting noteholders.
The new early deadline for first-lien bondholders to sign up is Monday at 5:00 pm, according to Caesars Entertainment's Wednesday filing with the Securities and Exchange Commission.
The amendment reduces the first-lien bondholders' 93.8 cents on the dollar recovery by three cents, according to KDP.
KDP had anticipated some resistance from the first-lien bondholders, a class with about $6.35 billion in debt, it said in a Tuesday report.
"While management may think this coercion tactic will incentivize first-lien note holders to accept the plan (before other parts of the plan are similarly taken away), first-lien holders could call management's bluff and hold out for more. For any plan to be favored by a court that could cram down lower-rated creditors in the structure, [it] needs to have a strong acceptance among top-tier holders," the report said.
The first-lien bondholder source anticipated other investors in the debt class would agree to meet the two-thirds threshold for acceptance either before or during a bankruptcy restructuring.
Caesars Entertainment is still in talks with CEOC's bank lenders, owed $5.36 billion in principal, trying to convince them to support the plan.
If the bank lenders continue to resist throughout the bankruptcy process, the first-lien bondholder said the company could work to court second-lien bondholders, owed $5.24 billion, to support the plan and instead of cramming down junior lenders could cram-up the bank lenders.
The company has had some talks with second-lien bondholders, the source said.
Separately, the International Swaps and Derivatives Association referred a dispute over a potential default to an external review committee on Monday.
The question stems from CEOC's decision to skip a $225 million debt service payment owed to holders of its 10% second-lien senior notes due 2018 and 10% second-lien senior notes due 2015 on Dec. 15, which started the clock on a 30-day grace period.
Certain second-lien bondholders have asserted that Caesars' attempt to make a mandatory redemption on its so-called applicable high-yield discount obligations, a type of debt security, constitutes an automatic default.
The outcome of the decision shouldn't affect the timing of Caesars' restructuring talks, since the date for triggering December CDS already has passed, Snow said.
Caesars Entertainment's equity has lost nearly 20% of its value over the past week, as it continues to push back deadlines for plans to get CEOC's first-lien bondholder count up to at least 60%.
The Nasdaq-listed stock closed at $13.20 Wednesday, down from its Dec. 31 closing price of $16.24. The company has a $1.92 billion market capitalization.
Buyout firms Apollo Global Management LLC and TPG Capital acquired a majority stake in Caesars Entertainment for $30.7 billion in 2008, and the company subsequently has struggled with its debt load.
Some $18.4 billion of Caesars' debt resides at CEOC, and the proposed restructuring plan would slash that number by nearly $10 billion.
Despite all of the hard work that has gone into drawing up the plan, Snow said there is a chance a bankruptcy court would side with investors who have sued the casino giant.
"It could be the case that the court would determine that [Caesars Entertainment's] actions taken up to this point did represent the things that creditors say they do, in terms of fraudulent transfers and unfair dealing. The actions that the company took over the last couple of years have been pretty severe in terms of extracting value out of the creditors," Snow said.
A Caesars Entertainment spokesman declined to comment.
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