Caesars negotiates support agreement, term sheet on restructuring plan

By Kali Hays

New York, Feb. 5 – Caesars Entertainment Operating Co., Inc. (CEOC) and Caesars Entertainment Corp. (CEC) are seeking approval of an amended restructuring support and forbearance agreement with consenting creditors that includes a term sheet on a prospective restructuring plan, according to a Feb. 4 motion with the U.S. Bankruptcy Court for the Northern District of Illinois.

Parties to the restructuring agreement include first-lien noteholders holding in excess of $5 billion in first-lien bond debt, or more than 80% of Caesars first-lien bond debt.

Additional parties to the agreement include holders of roughly $1 billion of Caesars first-lien bank debt, equal to 20% of the amount outstanding under the company’s bank facility and 5% of non-first-lien debt.

All parties to the agreement will forbear from exercising any default-related rights unless the support agreement is terminated.

Caesars said the agreement is supported by one-third of its $18.4 billion capital structure and offers a par recovery for holders of about $5 billion of first-lien bank debt, a consensually negotiated recovery to holders of about $6 billion of first-lien bond debt and meaningful recoveries to holders of junior debt.

Negotiations with other stakeholders are ongoing, but Caesars said that assumption of the restructuring agreement will provide a framework for those discussions, according to the motion.

The restructuring agreement also includes a “fiduciary out” allowing the debtors to “develop, consider and indeed prosecute any alternative proposals that provide higher or better recoveries for these estates.”

“This provision not only preserves optionality for the debtors, it also ensures that the debtors’ estates will not be foreclosed from considering alternative structures as a result,” the motion stated.

The company reorganization considered in the agreement includes the elimination of $10 billion in funded debt from Caesars’ balance sheet, enhanced creditor recoveries through the use of a real estate investment trust (REIT) structure, the settlement of complex litigation and “highly disputed” claims in exchange for material contributions from CEC and obtains some creditor concessions to permit meaningful recoveries to junior stakeholders.

Plan details

Under a term sheet for a possible restructuring plan, Caesars will reorganize its pre-bankruptcy corporate structure into two companies, OpCo and PropCo, in order to facilitate a REIT structure that will “enhance recoveries to all of the debtors’ stakeholders.”

Specifically, the plan requires that the debtors will transfer all owned real estate, related fixtures and some other property to PropCo and its subsidiaries. In turn, equity in PropCo will be held in a vehicle structured as a REIT, which will pay no entity-level tax to the extent that earnings are distributed.

Caesars’ operating assets, including gaming equipment and operating licenses, will remain in OpCo, which will be either CEOC or a CEOC subsidiary, and will then lease property assets from PropCo.

“The REIT structure permits stakeholders to benefit from the favorable trading multiples typically associated with REIT’s, thereby allowing the debtors to unlock the value of their properties for the benefit of all stakeholders,” the motion stated.

The plan also includes commitments from CEC to purchase up to 100% of the equity in OpCo for $700 million in cash from electing first-lien noteholders and to purchase up to 15% of the equity in PropCo for $269 million in cash, also from electing first-lien noteholders.

In addition, CEC agreed to contribute $406 million in cash to fund recoveries provided under the plan and a forbearance fee payable to certain first-lien noteholders and to provide a standby commitment of $75 million, which CEOC can draw on to fund distributions required under the plan in the event of a shortfall of sources and use to fund the reorganized capital structure upon consummation of the plan.

CEC will also guarantee OpCo’s obligations under its “go-forward lease” with PropCo, a 15-year lease that requires up to $635 million in rent per year.

Specific treatment of creditors under the plan will include the following:

• First-lien bank lenders will receive a proportionate mix of $705 million in cash, $883 million in new first-lien OpCo debt, $406 million of new second-lien OpCo debt, $1.96 billion in new first-lien PropCo debt and $1.45 billion in additional cash if the full amount of the Caesars Palace Las Vegas (CPLV) market debt is financed for cash;

• First-lien noteholders will receive a proportionate mix of $207 million in cash, $306 million in new first-lien OpCo debt, $141 million of new second-lien OpCo debt, $431 million in new first-lien PropCo debt, $1.43 billion in new second-lien PropCo debt, $1.15 billion in additional cash if the CPLV market debt is financed for cash, and for any unfinanced portion, mezzanine CPLV debt, 69.9% of PropCo on a fully diluted basis, and 100% of the OpCo new common stock.

Each first-lien noteholder will also have the opportunity to sell its right to receive under the plan some or all of its equity to the backstop parties for cash, to purchase PropCo preferred equity and/or receive cash from the non-first-lien noteholders for the right to receive some or all of their equity.

If the first-lien noteholders fully exercise this right, they will receive, on an aggregate basis, an additional $969 million in cash and a corresponding decrease in equity recoveries;

• Holders of non-first-lien obligations will receive a proportionate share of 30.1% of the equity in PropCo on a fully diluted basis, which will include consideration for the value of any unencumbered assets, if they vote as a class to accept the plan.

If they does not vote to accept the plan, they will receive a proportionate share of 17.5% of the equity in PropCo on a fully diluted basis; and

• Critical trade vendors will be paid in full in cash and the treatment of general unsecured creditors will be further agreed to by the parties to the restructuring agreement.

Plan milestones

The restructuring support agreement includes plan milestones that require Caesars to file a plan disclosure statement within 45 days of the petition date and obtain approval of the disclosure statement within 150 days of the petition date.

An order confirming the reorganization plan must be obtained within 120 days of the disclosure statement approval order and Caesars is required to emerge from bankruptcy within 120 days of the confirmation order, according to the agreement.

In addition, a final cash collateral order is to be obtained within 75 days of the petition date.

Caesars said that without approval of the agreement, “both the consenting creditors and CEC could feel compelled to protect their respective interests at each step of these Chapter 11 cases, leading to numerous objections and substantial litigation.”

“The terms of the RSA also represent the best restructuring opportunity available to the debtors, as reflected by the fact that no other alternative has materialized since the debtors began restructuring discussions with creditors in mid-2014,” the motion stated.

Caesars is a Las Vegas-based casino-entertainment company that filed for bankruptcy on Jan. 15 in the U.S. Bankruptcy Court for the Northern District of Illinois. The Chapter 11 case number is 15-01145.

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