Fitch Places Caesars Entertainment (CZR) Ratings on Watch Positive Amid Creditor Agreements

October 6, 2016 2:22 PM EDT

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Fitch Ratings has placed the ratings of Caesars Entertainment Corp (Nasdaq: CZR) (CEC, parent), Caesars Entertainment Resort Properties, LLC (CERP), Caesars Growth Properties Holdings, LLC (CGPH) and Corner Investment PropCo, LLC (The Cromwell) on Rating Watch Positive. A full list of Issuer Default Ratings (IDR) and issue-specific ratings follows at the end of this release.

The placement on Watch Positive reflects CEC and representatives of all of Caesars Entertainment Operating Company's (CEOC) major creditor classes reaching a restructuring agreement for CEOC. The Watch Positive also takes into consideration the reduced risk that a reorganization of CEOC will be materially detrimental to the credit profiles of Caesars' non-bankrupt entities, namely CERP and CGPH.

CEOC RESTRUCTURING PROGRESS

An agreement has been reached for CEOC to emerge from chapter 11 and be reorganized into an OpCo/PropCo structure. In order to get all major creditor classes on board, CEC and its sponsors recently increased its planned contributions toward creditor recoveries. This included the sponsors' remaining equity in CEC (company estimates the value is $954 million) and additional cash contributions through funding by director & officers liability (D&O) insurance.

The Watch Positive recognizes that a number of hurdles still remain for a successful reorganization of CEOC and that execution risk is present. This includes, but is not limited to, assurance that the proposed separation of the gaming operations and real estate assets will not create significant tax liabilities and successfully raising new debt needed to facilitate the proposed reorganization. The tax assurance (whether an asset spin-off or partnership contribution structure is utilized) can come in the form of either a private letter ruling from the IRS or a third-party opinion letter from Caesars' legal counsel, neither of which have been obtained yet to Fitch's knowledge.

Having all major creditor classes reach an agreement in terms reduces the risk that the non-bankrupt Caesars entities will be subject to a materially adverse outcome related to the CEOC related litigation. For CERP/CGPH, Fitch's primary concern has been related to a reversal of the asset sales and transfers or an assessment against CERP/CGPH. For CEC, the primary concern has been the linkage between CEC and CEOC vis-a-vis CEC's collection guarantee of CEOC's credit facility and the possibility that CEC would be liable under the payment guarantee of CEOC's notes. The revised reorganization plan will remove these risks as all pending and potential litigation claims and causes of action related to the parent guarantee and asset sales and transfers will be released once the CEOC reorganization plan is confirmed by the court.

Upon emergence CEC's IDR will be closely linked to the CEOC's proposed OpCo given the proposed guarantee of certain obligations by CEC. Fitch does not link the ratings of CERP and CGPH to CEOC or CEC given the tight restricted-payment covenants in these entities' debt documents.

CGPH/CERP CREDIT PROFILES

CEOC risk notwithstanding, CGPH's credit profile is more consistent with the higher end of the 'B' IDR category, and Fitch is likely to upgrade CGPH at least one notch upon the successful completion of CEOC's reorganization. CERP's credit profile is more consistent with the current 'B-' IDR given its higher leverage (7.5x as of June 30, 2016). However, Fitch anticipates CERP's credit profile will continue to improve and may be more consistent with a higher IDR at the time CEOC's reorganization is executed.

Both entities have delevered over the past few years through EBITDA growth, scheduled amortization, and revolver paydown. Leverage for CERP and CGPH (including the Cromwell) was 7.5x and 5.9x, respectively, for the LTM period ending June 30, 2016. Free cash flow (FCF) generation has also materially improved, with CERP and CGPH generating $151 million and $99 million of FCF during the same time period, respectively.

Additional delevering is likely as Fitch expects positive trends on the Las Vegas Strip to continue. Furthermore, the CERP and CGPH credit facilities contain 50% excess cash flow sweeps so long as senior secured leverage ratios are above certain thresholds (2.75x for CERP, 3.5x for CGPH). CGPH could also invest in additional capex projects in lieu of debt paydown. However, the incremental EBITDA benefit from such projects will also have a delevering effect.

RATING SENSITIVITIES

CERP

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Completion of CEOC reorganization without having a material adverse effect on CERP;
--Discretionary run-rate FCF sustaining above $100 million;
--Debt/EBITDA declining below 6.5x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Difficulty executing the proposed CEOC reorganization such that litigation risk for Caesars' non-bankrupt entities increases;
--Discretionary run-rate FCF declining towards $0;
--CERP's debt/EBITDA exceeding 9x for an extended period of time.

CGPH

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Completion of CEOC reorganization without having a material adverse effect on CGPH;
--Discretionary run-rate FCF sustaining above $100 million;
--Debt/EBITDA declining below 6.5x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Difficulty executing the proposed CEOC reorganization such that litigation risk for Caesars' non-bankrupt entities increases;
--Discretionary run-rate FCF declining towards $0;
--CGPH's debt/EBITDA exceeding 9x for an extended period of.

CROMWELL RATING CONSIDERATIONS

Fitch believes there is strong linkage between CGPH and the Cromwell. Cromwell is strategically important to CGPH given its profitability, prime location on the Strip, and focus on the millennial-based amenities such as the Drai's club.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Positive:

Caesars Entertainment Corp. (CEC)
--Long-term IDR 'CC'.

Caesars Entertainment Resort Properties, LLC (CERP)
--IDR 'B-';
--Senior secured first-lien credit facility 'B+/RR2';
--First-lien notes 'B+/RR2';
--Second-lien notes 'CCC/RR6'.

Caesars Growth Properties Holdings, LLC (CGPH)
--IDR 'B-';
--Senior secured first-lien credit facility 'BB-/RR1';
--Second-lien notes 'B-/RR4'.

Corner Investment PropCo, LLC (The Cromwell)
--Long-term IDR 'B-';
--Senior secured credit facility 'B+/RR2'.



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