Caesars Receives Default Notice from Second-lien Noteholders

NEW YORK (The Deal) -- The second-lien bondholders who served Caesars Entertainment (CZR) operating unit with a notice of default on Friday, June 6 have brought the casino giant one step closer to addressing long-brewing bondholder disputes.

The group has also taken issue with the casino operator's dismissal of them as a mere minority group.

Bruce Bennett, the Jones Day partner who is advising the second-lien group, commented via e-mail, saying, "Although the indenture allows 30% of the holders of a relevant issue to give notice of defaults, the notice delivered yesterday was given by holders of more than 50% of the largest issue of [Caesars Entertainment Operating Co.] second-lien notes, not holders of a minority."

Caesars acknowleged the notice of default from the group of holders of $3.7 billion in 10% second-lien notes due Dec. 15, 2018 issued by the company's operating subsidiary, Caesars Entertainment Operating Co. (CEOC), in a regulatory filing Friday.

The notice claims that certain asset sales out of their subsidiary constitute a default, as does the release of the parent company's guarantee of CEOC's debt.

Caesars also responded to the notice of default with a statement Friday: "We will not allow our company, our employees and the communities in which we operate to be held hostage by a minority of holders whose interests are contrary to the long-term health of the company."

The notes governed by that second-lien indenture account for about $3.7 billion of CEOC's total $18 billion debt load.

Sources see the default notice as a maneuver for the second-lien group, which includes hedge funds Canyon Capital Advisors LLC, Oaktree Capital Management LLC and Appaloosa Management LP, to get a seat at the negotiating table.

"We see merits in the bondholder allegations and we see the notice as a necessary first step to pursue creditor rights in the face of the aggressive actions by the sponsors," debt research firm CreditSights Inc. said in a June 8 report.

Creditsights believes the second-liens are making a case that, if it is correct, would benefit second-lien and first-lien bondholders at CEOC, but would be negative for classes of first-lien bank debt, legacy bonds and bonds issued by two other subsidiaries, Caesars Entertainment Resort Properties LLC and Caesars Growth Partners LLC.

If this notice of default forced CEOC to file for bankruptcy in the near-term, when it is "flush with cash," that outcome would have "mixed" benefit for creditors, CreditSights said. "[Creditors] would have enhanced recoveries...but they would otherwise have received this cash as coupon payments over the next couple of years."

Creditsights understands that Caesars has 60 days to respond to the default notice.

For now, the casino operator is providing limited commentary on its legal argument against the bondholders.

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