J.P. 摩根-美股-信贷策略-北美信贷市场策略-2019.3.26-24页.pdf

North America Credit Research26 March 2019Corrected Note(See page 21 for details)Caesars Sale?ICAHN Believe itCredit Implications of a Potl ERI/CZR Deal;CRC 5.25s to OW,Favor ERI 6%26sUS Credit ResearchMichael Pace AC(1-212)270-Colton F.Ransom(1-212)834-J.P.Morgan Securities LLCSee page 21 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment Weve given a potential sale of Caesars(CZR)quite a lot of thought over the last few weeks given Carl Icahns(Icahn)recent and meaningful purchases of CZR equity since mid-February(99m shares,or a total ownership of 120m shares including Converts and Forward contracts;14.4%stake on a fully diluted basis).Press reports have suggested that CZR might be sold(WSJ,February 14,2019),notably with Eldorado Resorts(ERI)as a likely buyer,which we think is one of only a few companies/management teams with the willingness,confidence,and the market credibility to pursue a transaction of this size and complexity.Icahn recently got three Board seats,and will get a fourth if a new CEO isnt found(with Icahns approval)by April 15th.Given Icahns activist and gaming industry history,we suspect strategic alternatives are likely to be discussed over the coming months,which could include the sale of the entire company.While we think ERI is the most likely buyer,we simply do not think a near-term deal imminent.ERI already has a strong standalone growth story and Apollo/TPG recently sold their entire CZR stake.We would be surprised to see a quick sale of CZR following an Apollo/TPG exit.We also note Tom Reeg comments at the recent JPM Equity Gaming conference that an imminent deal between CZR and ERI as reported in the press is simply not true.Finally,Icahns Forward Contracts(15m shares)dont expire until March 11,2020,providing almost another year to profit on these investments from an announced deal.As we discuss in the following report(among other things),we think the math“works”and believe a transaction is possible over the foreseeable future.This is based on strong FCF per share accretion,underpinned by reasonable(we think)opex synergies($430m base case),a willing market for real estate sales($2.2bn base case,VICI Properties likely),and attractive debt markets.We think this will largely come down to bid/ask(as usual)and whether or not Icahn and other large CZR shareholders want to pursue operational efficiencies and growth projects as a standalone company,or cash out a portion of this upside soon(we assume at a 30%premium below)and/or share in these opportunities with the equity of acquirer such as ERI.So how do gaming creditors proceed,particularly bondholders at other gaming operators,as well as VICI Properties(VICI)?We believe investors are somewhat worried about leveraging events from the sale of individual CZR assets,or in the case of ERI,the sale of the entire company.We think individual asset sales are unlikely,given the widely held view of the benefits of Caesars Rewards,and the resulting market“discount”buyers would likely want.We think Boyd Gaming(BYD)and Penn National Gaming(PENN),even Red Rock Resorts(RRR)would love to“pick-off”a few assets at the right price,but simply dont think buyer valuations would be attractive enough to benefit CZR shareholders or meaningfully help with ERI/CZR pf leverage.We dont believe MGM Resorts(MGM)is a likely buyer of CZR given the potential regulatory concerns of combined Las Vegas strip assets,nor do we think WYNN Resorts(WYNN)is interested in what they would perceive as Figure 1:ERI/CZR Rel ValIssuerBondRatingsBidYTWSTWVICI8 2023sBB*+/B1109.134.19%189bpWYNNLV4.25 2023sBB-*+/B198.504.65%234bpMGM4.625 2026sBB-/Ba397.005.11%272bpERI7 2023sB/B2104.005.28%283bpMGM5.75 2025sBB-/Ba3103.005.16%283bpCHDN4.75 2028sB+/Ba395.505.40%296bpCHDN5.5 2027sB+/Ba3100.255.45%319bpSGMS5 2025sB+/Ba397.005.55%319bpBYD6 2026sB/B3102.005.56%325bpBYD6.375 2026sB/B3103.505.56%327bpIGT6.5 2025sBB+/Ba2104.005.63%334bpRRR5 2025sB-/B396.505.65%329bpWYNNLV5.5 2025sBB-*+/B198.505.80%347bpIGT6.25 2027sBB+/Ba2102.505.82%346bpCGPHLC5.25 2025sB-/B396.006.00%368bpERI6 2025sB/B2100.006.00%368bpERI6 2026sB/B299.756.04%374bpPENN5.625 2027sB+/B297.006.11%375bpWYNNLV5.25 2027sBB-*+/B194.006.20%378bpHY Gaming/Leisure Index5.66%335bpDomestic HY Index6.84%450bpB Index6.95%465bpSource:J.P.Morgan;Pricing as of 03/25/1 92North America Credit Research26 March 2019Michael Pace(1-212)270- lower-quality assets,on average.We think both of these latter two companies are squarely focused on Japan opportunities.Finally,we think whatever happens here is a non-event to existing VICI debt,as we wouldnt expect pro forma leverage for acquisitions to exceed mid-5x.In fact,we would welcome potential new unsecured bond supply from VICI.Thus,we think these credits are safe as this CZR situation plays out,and markets are trading these bonds as such.But what about implications for ERI and Caesars Resorts Collection(CRC/CGPHLC)bonds?ERI bonds have been weak from the overhang that a potential bid for CZR is forthcoming,plus,there is a spirited debate on what would happen to CRC bonds within the CZR capital structure.While we believe ERI is the most likely buyer over time,we also disagree that credit risk is significant at either sets of bonds at current trading levels.In fact,we think both sets of bonds carry real takeout optionality.For CRC bonds,we do not believe there would be a 101 Change of Control(CoC)since CZR Parent can be acquired and not trigger a CoC under CEOC/CRC term loans or bonds.Also,we note relatively“loose”covenants in CRC bonds,including Permitted Liens(5x Secured),RP ability(unlimited 5x,or 5.25x w/CEOC Acquisition),Permitted Investment baskets,and even Asset Sales tests(18-month“reinvestment”period).As a result,we believe New Parent ERI debt acquisition funding can get collateral from CEOC,CRC equity and/or a meaningful amount of guarantees from CRC to help fund/structure a potential acquisition of CZR(more to come here later)without these bonds coming out.However,we also note the relatively modest breakage costs to redeem CRC bonds($50m to$75m estimate,timing dependent)in the context of the total pro forma capital structure and expected synergies.But we rarely see bond Make Wholes unless there are covenant issues.Even if CRC bonds remain outstanding,we think pro forma leverage at CRC could be much more modest(2.5x to 3.5x,lease-adjusted),or at the very least no higher than where it is today(6x lease adjusted).Thus,we see scenarios where CRC bonds remain outstanding and trade 25bp to 50bp inside of,and in a downside case,no worse than,pro forma Parent ERI HY risk,which we ultimately think would trade inside PENN 5 5/8s 27(97,or 6.1%/+375bp).We note CRC bonds are currently trading 96.5,or 5.9%/+360bps,so we think downside is limited and upside is possible.Accordingly,we are upgrading our rating on CRC bonds to Overweight(from Neutral)based on the possibility of an early takeout(103.25,11%IRR to 6/30/2020),or in line to slightly higher levels than where they trade today(5.5%to 6%,or 96 to 99;5%to 7.5%IRRs)even if bonds remain outstanding.We think bonds are generally Fair Value in a no M&A scenario.For ERI bonds,we actually think there is a reasonable probability(even a better chance versus CRC bonds)that ERI bonds would need to“come out”in a CZR deal.We note ERIs relatively tight Permitted Liens(4x net,$100m to$150m max cash),Permitted Investment baskets,Asset Sales tests(12-month“reinvestment”period),and less importantly(for now),Restricted Payment limitations(3x to 3.5x net,$100m to$150m max cash)and relatively modest Credit Facility debt incurrence baskets among its different bonds.While we admittedly struggle with the estimated$100m to$120m of“breakage”costs here,we simply think ERI bond covenants get“tight”with our likely financing/structuring scenarios and various baskets are unlikely to provide enough desired flexibility for a pro forma company 3North America Credit Research26 March 2019Michael Pace(1-212)270- of this size.Accordingly,the companys 6%notes due 2026 are our favorite bond within the ERI or CZR capital structures and recommend investors Overweight these bonds,even with a potential M&A overhang such as this.We note IRRs in the 12%context for these bonds in a mid-2020 takeout scenario(6/30/20,T+50bp),9%for the ERI 6%notes due 2025(callable beginning April 2020),and 6%for ERI 7%notes due 2023,which are currently callable.Even if ERI bonds remain outstanding,and similar to CRC bonds above,we think ERI 6%bonds due 2025/2026 would ultimately trade just inside of PENN bonds(6.1%/+375),even if new supply technicals pressured trading levels temporarily.And even if we are completely wrong here(bonds remain,with higher than expected pro forma leverage),we think downside for longer-dated ERI bonds is limited to the mid-6%area,or 2-3pts of downside.We like the upside/downside here.4North America Credit Research26 March 2019Michael Pace(1-212)270- Since mid-February 2019,Carl Icahn has amassed a roughly 14%equity position in CZR,including convertible notes and Forward Contracts on a fully diluted basis(converts).On March 1,2019,Icahn was given three Board seats,and will get a fourth if a new CZR CEO isnt found(with Icahn approval)by April 15,2019.Given Mr.Icahns activist and gaming industry history,we suspect this equity position(and Board representation)is based on a combination of an empty CZR CEO seat(Mark Frisora will step down by April 30,2019),additional CZR shareholders(large owners/previous CZR creditors following CEOC bankruptcy)and their likely willingness to go along with a review of strategic alternatives,and a possible view that CZR assets could be currently undervalued if taking a longer-term view.We suspect Golden Nugget shared some or all of these views given its reported interest in merging with CZR(Reuters,October 17,2018)and Tilman Fertittas subsequent reported purchase of CZR shares(Bloomberg,February 15,2019).Countering these new“buyers”includes the recent exit of CZR shares by Apollo and TPG(we suspect at least in part to Icahn),the companys original sponsors from the early January 2008 CZR LBO.Given this exit,we ultimately expect Apollo and TPG Board seats to be replaced,particularly Apollos.New Board members are likely to begin a strategic review of the company,if this hasnt already begun.Strategic alternative scenarios include the sale of some operating assets,the sale of underlying real estate(most likely to VICI),an acceleration of stock buybacks,running the business longer-term more efficiently and/or adding new growth engines,a combination of these items,or a sale of the entire company.First,we think a sale of individual assets is unlikely given the benefits Caesars Rewards program has on individual assets(cross selling/marketing among a large base of regional/LV strip casinos).While other operators would likely be willing buyers of individual properties,we believe valuation here would need to take into account the loss of Caesars Rewards,and selling too many assets could reduce the overall value of Caesars Rewards on remaining assets.Second,the sale of underlying real estate at a multiple above the current trading level of CZR stock is possible,and likely over time we think,but we simply dont believe a new Board is required to do this math for a standalone CZR entity.Third,we think an acceleration of share buybacks,with cash on hand and/or from potential asset sale proceeds doesnt make sense to us given CZRs already above average lease-adjusted leverage profile(6x gross)and the fact that CEOC just emerged from bankruptcy less than 18-monts ago.In fact,we note CZR recently stopped buying back stock.In our opinion,this was due in part to a pending CEO decision,but also because we think deleveraging is a priority for shareholders and the Board given leverage,as well as elevated capital spending($850m to$1bn 2019 guidance)and modest near-term FCF.Thus,we believe the most likely outcome from a strategic review will be to find a possible buyer of the entire company soon or attempt to run the business more efficiently longer-term(with some potential real estate sales)and look for a potential buyer down the road.We believe Eldorado(ERI)is the most likely buyer of the entire company,but we simply do not think a near-term deal is imminent.First,we note press reports(WSJ,February 14,2019)have highlighted ERI as a potential buyer.Next,we note ERI just recently bought Tropicana assets from Icahn,so we suspect this relationship continues,and finally,we believe ERI(and CEO Tom Reeg specifically)is likely one of only a few companies/management teams with the willingness,confidence,and the market credibility to pursue a transaction of this size and complexity.Plus,we think this could solve for the longer-term CEO seat uncertainty at CZR.However,we dont think a near-term deal is imminent given ERI already has a 5North America Credit Research26 March 2019Michael Pace(1-212)270- strong standalone growth story and Apollo/TPG recently sold their entire CZR stake.We would be surprised to see a quick sale of CZR following an Apollo/TPG exit.We also note Tom Reeg comments at the recent JPM Equity Gaming conference that an imminent deal between CZR and ERI as reported in the press is simply not true.We think ERI can be patient here,although we also believe it would like to pursue additional acquisitions over the near-term to further capitalize on its M&A synergy strategy.We also highlight that Icahns Forward Contracts dont expire until March 11,2020,almost another year for a potential sale announcement(dont need a close here).While we do not believe an ERI/CZR deal is imminent,we do think the math“works”and believe a transaction is possible over the foreseeable future.Our analysis is underpinned by historical premiums paid by ERI for past acquisitions,reasonable(we think)cost synergies,primarily at regional properties and corporate overhead,and total pro forma net lease-adjusted leverage of no higher than“mid-5x”at close,including expected cost synergies.We note ERI announced its acquisition of Isle of Capri back in September 2016,which included a 36%premium to Isle of Capri share price.For simplicity we assume 30%for our base case,or$11 CZR share(including Convert dilution),but show a range of valuations for pro forma balance sheet sensitivities.For cost synergies,we believe$430m is reasonable(see Potential Caesars Opex Synergies table that follows),broken down by$200m to$325m from bringing CZRs Other US(regionals)margins in line with our expectations for ERIs overall business,as well as$100m to$190m of corporate overhead reductions.We acknowledge there may be some allocation of expenses