NEW YORK--(BUSINESS WIRE)--Caesars Entertainment Corp.'s (Caesars; the parent, CEC) PropCo refinancing terms as reported by Bloomberg and other media outlets is a slight negative for the ratings of Caesars Entertainment Resorts Properties, LLC (CERP), according to Fitch Ratings.
Per Bloomberg, CERP's first lien note par amount will increase to $1.0 billion-$1.5 billion from the original $500 million amount originally announced while the first lien term loan would decline to $2.0 billion-$2.5 billion from $3.0 billion.
The reported pricing on the first and second lien notes is also slightly higher than Fitch originally modeled. Factoring in the reported pricing and the shift towards more expensive notes, Fitch revised the interest expense for CERP upwards by $24 million assuming the high end of the first lien notes issuance range. This is a credit negative relative to our prior base case estimates, but we still expect positive free cash flow (FCF) in 2014 of around $40 million-$50 million and more than $100 million in FCF by 2016 at CERP.
CERP's FCF profile remains commensurate with its 'B-' issuer default rating (IDR) and Stable Outlook. However, the FCF buffer is somewhat diminished and provides less cushion against potential disruptions related to Caesars Entertainment Operating Company (CEOC). These could include change in lease terms related to the Octavius Tower and Project Linq (assets being leased to CEOC by CERP), change in terms of the shared service agreement between CERP and CEOC, and other issues relating to a potential default at CEOC.
There are no implications on CERP debt's recovery prospects in an event of default since the par amount of first lien and second lien debt will remain the same as before.
On Sept. 25, CEC announced it would issue 10.0 million shares plus a 1.5 million underwriter option, which could raise up to $241 million of gross proceeds based on its pricing date of Sept 25. We view this as a slight credit positive for CEOC, as it provides the parent additional liquidity to fund cash burn at CEOC. However, we still forecast a liquidity crunch at CEOC around 2015 based on CEOC's negative FCF as well as other uses of cash such as debt maturities. Options to forestall or avert a liquidity crunch past 2015 include additional first-lien issuance (has a $1.15 billion accordion option) and/or additional asset sales.
Additional information is available on www.fitchratings.com
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