Fitch Affirms Caesars Subsidiaries' IDRs at 'B-' Following Examiner Report

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Caesars Entertainment Corp (CEC) at 'CC' and the IDRs of Caesars Entertainment Resort properties, LLC (CERP), Caesars Growth Properties Holdings, LLC (CGPH) and Corner Investment PropCo, LLC (Corner) at 'B-'. Fitch also affirmed the issue ratings of CERP, CGPH and Corner (issue ratings listed at the end of the release). These subsidiaries' Rating Outlooks remain Stable.

KEY RATING DRIVERS

Fitch's affirmation of Caesars' IDRs follows the release of the examiner's report investigating transactions with Caesars Entertainment Operating Company, Inc (CEOC), which is now in bankruptcy. Neither CERP nor CGPH is well equipped to handle potential claims identified in the report. However, the range of outcomes remains broad enough that CERP's and CGPH's 'B-' IDRs adequately capture the risks associated with these potential claims. Fitch expects CEOC and CEC to contest the findings and to continue to seek resolution with the CEOC creditors without disrupting CERP or CGPH.

The Stable Outlook reflects Fitch's expectation that the resolution to CEOC's bankruptcy will take considerable time, possibly more than two years, a typical timeframe to resolve a Negative Outlook. In the case of Lehman Brothers and Tribune Company, complex bankruptcies involving examiners, the timespan between the examiner's report and emergence was approximately two years. Caesars' own situation is especially complex in terms of the transactions prior to bankruptcy, the multiple tiers of creditors and difficulty of valuing Caesars' assets - both in and outside CEOC.

EXAMINER FINDINGS MORE NEGATIVE THAN FITCH EXPECTED

The examiner's report identified $3.6 billion - $5.1 billion of potential claims against Caesars entities, its directors and the LBO sponsors - Apollo and TPG. Of these claims, Fitch has identified $1.2 billion that directly relates to CERP and $1 billion - $1.3 billion that relates to CGPH. Fitch believes that neither CERP nor CGPH have the covenant or financial strength capacity to absorb the claims of this magnitude should the court agree with the examiner's report and the claims are directed against CERP and CGPH. In the scenario analysis Fitch ran where CERP and CGPH raise debt to make the shortfall payments, both entities end up with negative FCF and leverage exceeding 9x.

For CERP, the examiner identified $329 million - $427 million in potential claims relating to the 2013 transfer of Octavius Tower and Linq. This range is gross of the cash and debt forgiveness consideration provided by CEC for the assets since the examiner thinks CERP did not act as a good faith transferee. Another $829 million of potential claims is related to CERP's use of CEOC's management services and Total Rewards loyalty program. The examiner makes an argument that CEOC was not adequately compensated for CERP's use of these services prior to and after the creation of Caesars Enterprise Services (CES), through which CERP will get these services going forward.

The examiner's valuation of Octavius Tower/Linq was consistent with our own but Fitch did not expect as large of a claim estimate relating to the management services and Total Rewards. In general, the scope of investigation relating to CES was broader than Fitch expected.

For CGPH, the examiner found a consideration short-fall for Planet Hollywood of $363 million - $484 million and for the second batch of sold casino assets (Bally, The Quad, The Cromwell and Harrah's New Orleans) a short-fall range of $592 million - $968 million. The report also identified $109 million - $146 million of value for land that came with the second batch of assets that CEOC allegedly was not properly compensated for. The examiner's fair value estimates for CGPH were well above our own. The main difference in valuation relates to the examiner using outer year projections for these assets; whereas, Fitch used LTM figures making certain pro forma adjustments (e.g. The Quad room renovations).

POTENTIAL RESOLUTION REMAINS UNCERTAIN

Fitch continues to believe that a reversal of the CEOC transactions - as seen in the Dynegy case - is an unlikely yet real risk. The examiner's report states throughout that the reversal of asset transfers in fraudulent transfer cases is uncommon, although also states that it remains an option. The report's analysis cites the alleged shortfalls between the considerations paid by CEC or its entities for CEOC assets relative to the fair value. In many cases, the examiner identifies the entities receiving the assets (transferees) as good faith transferees, meaning that that the amount owed to CEOC would be net of the consideration already provided.

To Fitch's best knowledge, Caesars is still working to get CEOC creditors to agree to its restructuring support agreement (RSA) with the first-lien creditors being largely on board. The last RSA, amended in October 2015, contemplates approximately 100%, 73% and 9% recoveries for the first-lien term loan holders, first-lien bondholders and more junior bondholders, respectively. The plan includes splitting CEOC into an OpCo/PropCo structure and mortgaging Caesars Palace. Creditors would receive debt and equity securities tied to these entities and some of these securities creditors can put to CEC for cash.

The largely negative examiner's report may make executing the RSA in the current form more difficult. However, CEC has potential levers to make the RSA more attractive for CEOC creditors before risking having the CGPH and CERP related transactions unwound or having these entities become insolvent. Such levers could include offering CEOC creditors equity in CEC or certain components of CEC.

RATING SENSITIVITIES

No positive rating action is expected over the near-term given the CEOC related risk and, in CERP's case, the high leverage. Positive rating action may result from CEOC's debt being restructured without having a material adverse effect on CERP/CGPH, discretionary FCF sustaining above $100 million and leverage declining below 6.5x (for both entities).

Future developments that may, individually or collectively, lead to negative rating action include a court ordered reversal of the respective CEOC asset transactions or significant assessments against CERP or CGPH; discretionary FCF declining towards $0; and leverage exceeding 9.0x for an extended period of time.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Caesars Entertainment Corp. (CEC)

--Long-term IDR at 'CC'.

Caesars Entertainment Resort Properties, LLC (CERP)

--IDR at 'B-'; Outlook Stable;

--Senior secured first-lien credit facility at 'B+/RR2';

--First-lien notes at 'B+/RR2';

--Second-lien notes at 'CCC/RR6'.

Caesars Growth Properties Holdings, LLC (CGPH)

--IDR at 'B-'; Outlook Stable;

--Senior secured first-lien credit facility at 'BB-/RR1';

--Second-lien notes at 'B-/RR4'.

Corner Investment PropCo, LLC (The Cromwell)

--Long-term IDR at 'B-'; Outlook Stable;

--Senior secured credit facility at 'B+/RR2'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective from 7 December 2015 to 1 April 2016 (pub. 07 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001945

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001945

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160404005992/en/

Fitch Ratings
Primary Analyst
Alex Bumazhny, CFA
Senior Director
+1-212-908-9179
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Mansfield, CFA
Associate Director
+1-212-908-9113
or
Committee Chairperson
John C. Culver
Senior Director
+1-312-368-3216
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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