Caesars Entertainment Operating Company (CEOC)
Distressed Debt: Senior Secured Debt Idea Initiation
January 16, 2015
PROPOSAL: Buy CEOC Senior Secured debt up to $60 for 3-year IRR of ~21%
- Recent Price: $76
- Face Value: $6,345 million
- Available Securities
- CEOC Debt Stack by Priority
- Term Loans: $5,360
- Senior Secured Debt: $6,675
- Junior Secured Debt: $5,252
- Unsecured Debt: $1,107
- Total: $18,394
- Cash: $1,480 million
Caesars Entertainment Operating Company (CEOC) is a non-guaranteed subsidiary of publicly-traded Caesars Entertainment (NASDAQ: CZR). Private equity firms Apollo and TPG purchased CZR in 2007 just prior to the financial crisis, loading CZR with over $20B of debt. As the economy collapsed in late 2008, daily room rates and capacity utilization at CZR properties plummeted, quickly rendering its debt load unsustainable. Since 2008, Apollo and TPG have taken a number of actions to salvage their equity investment in CZR – chief among them, removing CZR’s guarantee of CEOC debt and transferring assets out of the CEOC subsidiary. CEOC debt has not fared well under the Apollo/TPG-led restructuring: the Senior Secured 2020 8.5s fell over 25% in 2014 to ~$73, while the Junior Secured 2018 10s fell almost 70% to ~$16. Junior Unsecured Debt holders have since sued CZR for undervaluing the asset transfers by upwards of $3.6B (see here and here). Apollo and TPG claim the asset transfers were done fairly, and have proposed a restructuring plan to senior lenders and secured bond holders. Under the proposed restructuring, Term Loan holders would receive $100 while Senior Secured Debt holders would receive just under $94 (11/18/14 8K filing exhibit).
- Corp Structure: Convert CEOC to publicly-traded REIT via OpCo/PropCo structure
- Pro Forma Debt Stack: Replace $18,394 existing debt with $8,152 new debt
- 1st Lien OpCo: $1,188 @ 5%
- 2nd Lien OpCo: $547 @ 8.5%
- 1st Lien PropCo: $2,392 @ 4.5%
- 2nd Lien PropCo: $1,425 @ 8%
- CPLV Mortgage: $2,600 @ 5%
- REIT Financials
- NNN Rent Income: $635 million
- CAPEX: $78 million
- INTEX: $352 million
- FCF to Equity: $205 million
EV Available to Debt Structure.
- PropCo Equity FV: $2,567 million (12.5 times FCFE)
- CEOC Pro Forma Debt: $8,152 million
- Adj. Cash on Hand: $740 million (50% of 3Q14 Cash balance)
- Available EV: $11,459
Senior Secured Debt Fair Value.
- EV to Senior Secured Debt: $6,099 (Available EV – Term Loans)
- SSD Face Value: $6,675
- SSD Fair Value: $91.37 (EV to SSD / SSD Face Value)
- Debt: $2,792
- Cash: $740
- Equity: $2,567
IRR Overview. Assuming CEOC exits Chapter 11 within the next twelve months – and the SSD trades at the above-calculated FV at exit – the 1-year IRR from a recent price of $76 is approximately 20%. While a seemingly attractive IRR for a relatively market-neutral special situation, it does not provide a sufficient margin of safety against *time*. For example, if C11 extends just six more months, the IRR falls to 13%. As such, I would rather look at the investment from a “full-cycle” perspective that allows for A) an extended C11 process and B) the post-reorg equity to fully re-value.
For the full-cycle analysis I assume the following: a 3-year duration, a PropCo terminal PE of 15 times, two years of REIT dividends ($411 total), and most critically, that the Cash & Debt received in the restructuring ($3,532) is NOT reinvested after the C11 exit but rather held until the end of year 3. Using this construct, from a recent $76 the 3-year IRR is approximately 11.5% per annum. The target BUY price of $60 yields a 3-year IRR of just under 21% per annum.