Caesars Makes Another Move to Insulate Healthy Subsidiaries

NEW YORK (The Deal) -- Las Vegas-based casino operator Caesars Entertainment (CZR) 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.

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.

Apollo and TPG bought a majority stake in Caesars Entertainment for $30.7 billion in 2008, heavily leveraging the casino operator just as the economic downturn dealt the gaming industry a lousy hand.

CEOC has about $18 billion in debt and generated $6.3 billion in revenue during 2013, according to a May 8 report by Moody's Investors Service. The parent company, Caesars Entertainment Corp., had $23.58 billion in debt at March 31.

Major ratings agencies Moody's, Standard & Poor's, and Fitch Ratings Inc. have all stated that efforts such as the transfer of assets out of CEOC and the increase of first-lien debt at that unit have dimmed the recovery prospect for Caesars Entertainment's bondholders.

Two groups of CEOC bondholders have already mobilized to allege that certain asset transfers out of the operating unit were fraudulent, and that CEOC is insolvent.

A second-lien bondholder group that includes hedge funds Canyon Capital Advisors LLC, Oaktree Capital Management LLC and Appaloosa Management LP is being advised by Jones Day's Bruce Bennett.

A first-lien group is being advised by Kenneth Eckstein and Thomas Moers Mayer of Kramer Levin Naftalis & Frankel LLP.

Holders of CEOC first-lien bonds include Goldman Sachs Asset Management.

Both groups object to moves such as the $2.2 billion sale of Bally's Las Vegas, the Cromwell, the Quad and Harrah's New Orleans by CEOC to CGPH, which was announced on March 3 and closed this month.

On May 6, Caesars revealed a plan to refinance all 2015 debt maturities and remove the parent company's guarantee of CEOC's debt.

The plan will increase the amount of first-lien debt in CEOC's capital structure by $900 million, which will "lower the recovery prospects for all classes of CEOC's debt," Moody's said on May 8.

Ultimately, the brewing battle between bondholders and CEOC's PE sponsors will come down to a question of "whether or not [the sponsors] have overplayed their hand in taking away asset value from CEOC," Snow concluded.

A Caesars Entertainment spokesman didn't respond to requests for comment.

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