$18.4 Billion Bankruptcy Bet on Caesars Is Backfiring With Lenders

By Steven Church

Photographer: Jacob Kepler/Bloomberg

Caesars Entertainment Corp.'s Caesars Palace casino stands in Las Vegas, Nevada.

Lower-ranking creditors of Caesars Entertainment Corp. (CZR) moved to force the casino company’s main operating unit into bankruptcy in an attempt to block a plan they say protects the owners at their expense.
In a filing today in U.S. Bankruptcy Court in Delaware, Appaloosa Investment LP and funds affiliated with Oaktree Capital and Tennenbaum Capital asked a judge to appoint an examiner to investigate claims insiders “plundered” the unit. Insiders paid themselves hundreds of millions of dollars while moving assets out of the reach of second-lien debt holders, according to the filing.
“These insider transactions stripped the debtor of most of its valuable income-generating assets and hundreds of millions of dollars of cash, leaving the debtor burdened with massive debt that cannot be repaid,” the lower-ranking creditors said in court papers.
Caesars has been working on a plan that would put the unit into bankruptcy
voluntarily as soon as this week and turn it into a real estate investment trust. The involuntary case doesn’t give creditors control over Caesars and doesn’t immediately restrict company managers.
The company called the Appaloosa filing a ploy to block that plan and promised a formal response “shortly.” Until then, it’s business as usual at the casinos, and the company plans to proceed with the previously announced restructuring agreement, Caesars said in a statement.

Senior Deal

The involuntary filing threatens to hinder the Las Vegas-based company’s plans. Caesars last month announced an agreement with some more senior creditors to reorganize the operating unit in bankruptcy and cut its debt to $8.6 billion from about $18.4 billion. That filing could still come, leaving the courts to decide which case to permit, and where.
Leon Black’s Apollo Global Management LLC (APO) and David Bonderman’s TPG Capital have controlled Caesars Entertainment since taking it private in 2008 through a $30.7 billion leveraged buyout. The transaction saddled the operating unit with more debt than it can handle at a time when U.S. casinos are suffering from a glut of competition.
Because the bankruptcy filed today is involuntary, Caesars doesn’t face immediate restrictions on selling or transferring assets and doesn’t need court permission for other major decisions, said Bruce Grohsgal, a professor of bankruptcy law at Widener University School of Law. But the company still gets the benefit of having lawsuits against it halted.

Restrict Company

To stop managers from taking actions they don’t like, creditors would first need to convince a judge to restrict the company, Grohsgal said. The company can fight those restrictions, unlike in a voluntary case.
By moving to put the unit into bankruptcy now, Appaloosa may be angling for a jurisdictional advantage, said Erik Gordon, a lawyer and a professor at the University of Michigan’s Ross School of Business.
The court in Delaware may be more neutral compared with judges in communities where the operating unit has many employees or other close financial ties, like Nevada, Illinois or New Jersey, Gordon said.
The filing also gives Appaloosa and other creditors the chance to get their story before a judge first, framing the bankruptcy as a fight over whether equity holders are trying to benefit at the expense of creditors, Gordon said.
Typically in bankruptcy, creditors must be fully repaid before owners can retain their stakes or collect anything. The deal Caesars worked out with the senior lenders may allow the company’s owners to retain some equity.

Automatic Halt

Under the bankruptcy code, should Caesars file a second bankruptcy case in a different jurisdiction, that would be automatically halted until the judge overseeing the first case decided the proper venue, Grohsgal said.
The filing by Appaloosa and the other noteholders follows months of negotiation and litigation between Las Vegas-based Caesars and its creditors. The funds listed on the involuntary petition hold about $41 million in second-lien debt.
The company has worked out a plan with senior creditors that requires Caesars Entertainment Operating Co., the most indebted subsidiary, with $18.4 billion of borrowings, to exit bankruptcy court as a reorganized set of companies by February 2016, according to a regulatory filing last month.
Should a bankruptcy judge appoint an examiner or a trustee with “expanded powers,” creditors that signed the deal can back out.

Two-Thirds

Caesars said last week that it expected investors holding two-thirds of its senior bonds to back the restructuring plan. That threshold would allow it to seek court approval of the plan. Even with such support, however, other creditors still have the right to challenge.
“The claims are a transparent attempt to thwart a restructuring that has been agreed to by more than two-thirds of CEOC’s first-lien noteholders,” Caesars said in the statement in response to Appaloosa’s court filings. “The action is designed to injure CEOC while these junior creditors attempt to boost their standing.”
Under Chapter 11 of the U.S. Bankruptcy Code, creditors can force a company into bankruptcy by claiming it’s generally not paying its debts. The company can either dispute the claims and seek to have the involuntary petition thrown out, or move to convert the case into a voluntary bankruptcy and reassert its control over the reorganization.

Keep Control

A company initially retains control of its operations in the days following an involuntary bankruptcy while creditors and company officials fight in court over what should happen next.
Last year, creditors sued Caesars, with some accusing it of shifting the most valuable assets out of the operating company to other units.
The operating unit moved its online gambling business, worth about $780 million, to another Caesars’ entity. It also transferred ownership of two Las Vegas properties: a hotel and a dining, shopping and entertainment corridor. Creditors said the unit didn’t get enough in return for the assets.
The goal was to create a “good Caesars” with lower debt and profitable assets and a “bad Caesars” with higher debt and less valuable assets, according to one lawsuit, filed by a trustee for second-lien creditors. Should “bad Caesars” fail, “good Caesars” would be protected, the creditors said.
In December, the company skipped a $225 million interest payment on the second-lien notes, days before announcing its restructuring plan. Appaloosa and other holders of those notes moved to put the brakes on that plan with today’s filing.
Under the company’s proposed Chapter 11 plan, second-lien noteholders would never receive the interest payment, according to the filing.

Small Fraction

“Instead, the plan would treat holders of second-lien notes as fully unsecured, and provide them with equity that even the debtor values at a small fraction of the outstanding principal,” according to the filing.
The creditors asked the court to appoint an examiner “to investigate and report on a series of pre-petition insider transactions by which the parent of Caesars Entertainment Operating Co. Inc. systematically stripped the debtor of many billions of dollars of assets and cash in the 15 months prior to bankruptcy.”
The case is In re Caesars Entertainment Operating Co., 15-10047, U.S. Bankruptcy Court, District of Delaware (Wilmington).