Lawmakers, union assail Caesars’ REIT plan
There was nothing but bad news last week for Caesars Entertainment in its long fight to secure approval of a bankruptcy reorganization plan for its largest operating unit, Caesars Entertainment Operating Company (CEOC).
CEOC has so far failed in its efforts to get at least half of its second-lien bondholders to approve of the restructuring plan it negotiated in late 2014 with its top bondholders. That plan, which would split Caesars Entertainment into two companies— a real-estate investment trust (REIT) to own its properties and a management company to lease and operate them—would slice an estimated $10 billion from CEOC’s $18 billion in debt.
Chicago U.S. Bankruptcy Judge A. Benjamin Goldgar will not approve the restructuring plan without approval of at least half of the lower-level creditors—many of the same creditors who have filed lawsuits against the company because of major transactions that led to the restructuring plan, including asset transfers that moved major properties out of CEOC just prior to its January 2015 bankruptcy filing.
Plaintiffs in the lawsuits are seeking to have those transactions declared invalid, which could force parent Caesars Entertainment and its private-equity owners, Apollo Global Management and TPC Capital, into Chapter 11 bankruptcy. One lawsuit seeks to invalidate CEOC’s bankruptcy in favor of a forced bankruptcy petition filed against Caesars Entertainment a few days after CEOC’s filing.
Complicating matters is the fact that the first-lien bondholders party to the restructuring agreement have themselves withdrawn their prior approval and asked that the restructuring be renegotiated.
Last week, retired federal judge Joseph Farnan, the court-appointed mediator between Caesars and second-lien bondholders, reported that negotiations over CEOC’s restructuring plan are deadlocked. In a short statement filed with the Chicago bankruptcy court last week Farnan said, “I believe there is currently no likelihood of material progress in the discussions.”
Farnan’s filing also said that while the creditors are willing to meet again with the operator, Caesars is not open to further discussions. Caesars recently offered the creditors $4 billion in cash, stock and debt to settle their claims—which was up from an original offer of $1.5 billion. In return, the creditors would have to cancel all current or future litigation related to the ring plan.
According to Farnan and a committee representing the creditors, the offer is not enough. The creditors are citing a report from a court-appointed bankruptcy examiner that concluded the bondholders could retrieve as much as $5.1 billion through the lawsuits. Their original investments of plaintiffs in five lawsuits amount to about $11.4 billion.
A status hearing is scheduled for tomorrow (Tuesday, June 14) in Chicago federal court.
Goldgar said last week that he is studying whether or not he has the authority to grant Caesars’ motion that the bondholder lawsuits be halted as the bankruptcy case progresses. He said in bankruptcy court in Chicago that he may not have the power to stop the lawsuits because they are already in motion. “I’ll take a look when there’s more time,” Goldgar said in pledging to study prior case law further.
Shares of Caesars fell 5.6 percent to $8.19 after the Wednesday hearing.
Jim Millstein, a financial adviser to the bankrupt operating unit, testified that losing the court cases and being faced with billions in damages would likely force parent Caesars Entertainment into bankruptcy. Millsteen said that would cost another $200 million a year in expenses that would have priority over creditors’ claims. “Time is not our friend,” he said, according to Reuters.
Meanwhile, the Caesars restructuring plan and its resulting split of the company is being opposed by members of the U.S. Congress and by the company’s major casino union.
U.S. Congress members urged Treasury Secretary Jacob Lew to deny Caesars Entertainment a favorable tax ruling relating to the company’s plan to create the REIT structure, saying it amounts to a tax subsidy. In a May 25 letter revealed last week by Reuters, 15 Congress members said CEOC’s restructuring plan abuses the original intent of REITs, originally conceived to help small investors dabble in real estate.
“The REIT would effectively shelter a considerable portion of the casinos’ profits,” the letter said, “thus functioning as a taxpayer-funded subsidy to one of the largest casino companies in the U.S. and its private equity owners.”
The letter was signed by 14 Democrats and one Republican, Rep. Frank LoBiondo, who represents Atlantic City, where Caesars owns three casino hotels.
UNITE HERE, the largest casino employee union serving Caesars employees, also came out against the REIT plan last week. A report by union analyst Ben Begleiter said a Caesars REIT would be riskier than other big, publicly traded real estate trusts. At $6.05 billion, the Caesars investment trust would have the second-highest debt level of any retail REIT with similar rental contracts, known as triple-net leases, creating the highest ratio of debt to earnings before interest, taxes, depreciation and amortization, Begleiter’s report said.
The REIT would also have only one tenant to rely on for rent, its main source of income, the report continued. Most REITs lease property to many businesses.
“Portfolio diversity is a commonly understood safeguard against debilitating revenue declines resulting from downturns in a single industry or the flagging financial fortunes of a single tenant,” Begleiter said in the report.
