Caesars Bankruptcy Sets Legal Battle

Senior creditors on board with plan

The ongoing battle of Caesars Entertainment, the industry’s most indebted operator, to restructure the largest portion of its record $25 billion in debt reached its climax last week as Caesars Entertainment Operating Company (CEOC), which holds $18.4 billion of the debt, filed for Chapter 11 protection in an Illinois U.S. bankruptcy court.

The Thursday filing sets up a legal battle between Caesars and its lower-level creditors, who two days earlier filed a motion in U.S. Bankruptcy Court in Delaware to force CEOC into an involuntary bankruptcy there.

The second-lien bondholders, led by 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, enriching themselves while engineering a restructuring that will place their assets out of reach—and leave the lower-level creditors holding the bag for their investments.

“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-level creditors said in court papers.

The three second-lien hedge funds are owed $41 million. Caesars skipped a $223 million interest payment on the debt on December 15, and made its Chapter 11 filing at the end of its 30-day grace period, after which the lower-level creditors would have been able to claim default and force the involuntary bankruptcy. The creditors are claiming their move last Tuesday is valid because Caesars’ illegal moves invalidated the grace period.

Caesars officials vowed to fight the bankruptcy motion, noting that it has no holdings in Delaware, and that the second-lien noteholders are improperly blocking a restructuring plan approved by more than 80 percent of first-lien noteholders.

“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.”

The agreement reached with the top CEOC creditors was negotiated for more than four months. The plan “is intended to significantly reduce long-term debt and annual interest payments,” said a statement from Caesars, “while providing for significant recoveries for creditors and ensuring no interruption of operations across the company’s network of properties.”

The voluntary filing of CEOC and some of its U.S. subsidiaries is for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago. The statement noted that all Caesars Entertainment properties, including those owned by CEOC, “are open for business and are continuing to operate in the ordinary course.”

“Today, with the overwhelming support of our first-lien bondholders, we are moving forward to implement our previously announced restructuring plan, which is intended to strengthen CEOC’s financial condition and significantly reduce debt,” said Caesars Chairman and CEO Gary Loveman in the statement. “We believe this restructuring is in the best interests of all of CEOC’s stakeholders and will result in a sustainable capital structure for CEOC and value creation for all stakeholders.

“The restructuring of CEOC is the culmination of a years-long effort to improve the health of CEOC’s balance sheet, which has included substantial investment in new and upgraded assets, especially in Las Vegas. I am very confident in the future prospects of our enterprise, which will combine an improved capital structure with a network of profitable properties.”

Loveman added that all Caesars properties will remain open without interruption during the reorganization, and players will continue to earn points through the national Total Rewards loyalty program. “Our team remains entirely focused on delivering the same outstanding service and unforgettable entertainment experiences guests have come to expect from Caesars Entertainment,” Loveman said. “Going forward, we will continue to develop and deliver new, innovative hospitality experiences to our guests.”

Under the terms of the proposed financial restructuring, CEOC will convert its corporate structure by separating virtually all of its U.S.-based gaming operating assets and real property assets into two companies: an operating entity and a newly formed, publicly traded real estate investment trust that will directly or indirectly own a newly formed property company.

The proposed transactions would reduce CEOC’s debt by approximately $10 billion, providing for the exchange of approximately $18.4 billion of outstanding debt for $8.6 billion of new debt. Annual interest expense would be reduced by approximately 75 percent, from approximately $1.7 billion to approximately $450 million. The REIT would lease its real property assets to the operating company in exchange for annual lease payments of $635 million, subject to certain adjustments, with the lease payments guaranteed by Caesars Entertainment.

Under the proposed plan, Caesars Entertainment will make substantial cash and other contributions to support the restructuring. The completion of the previously announced merger of Caesars Entertainment and Caesars Acquisition Company will allow Caesars Entertainment to make these contributions without the need for any significant outside financing. The merged company will be in a strong position to serve as a guarantor for the lease payments the REIT will make to the operating company.

The restructuring is conditioned upon the release of all pending and potential litigation claims against Caesars Entertainment, Caesars Acquisition Company and related parties. The proposed restructuring plan remains subject to approval by the Bankruptcy Court and gaming regulatory approvals.

Randall S. Eisenberg, a managing director at AlixPartners, has been named chief restructuring officer of CEOC. In this role, Eisenberg will oversee the Chapter 11 cases and implementation of the restructuring transactions at the operational level. CEOC has established a dedicated website, ceocrestructuring.com, for stakeholders to access current information about the restructuring.

The next action is likely to be a ruling on whether the Delaware case is valid. In an interview with the Associated Press, Cathy Reece, director of law firm Fennemore Craig’s bankruptcy practice, noted that Enron filed for bankruptcy in New York, rather than in its home state of Texas, and the court agreed.

In its response to the Delaware judge, Caesars’ legal team noted that the Illinois bankruptcy is proper, since the company owns and manages several properties in the region, including two in Illinois, Harrah’s Joliet and Harrah’s Metropolis, and the Horseshoe Hammond casino in Indiana near Chicago.

The operator also must still deal with two other pending lawsuits, one by a trustee for another group of second-lien creditors that alleges the company’s restructuring is designed to leave lower-level creditors with a fraction of their investment. “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,” said attorneys in that lawsuit filing.

Caesars is asking the judge to dismiss that lawsuit on the grounds that bankrupt companies are automatically protected from litigation.

The operator has struggled with debt since its $30 billion leveraged buyout in 2008 by private hedge funds Apollo Global Management and TPG Capital, just before the worst of the recession.

In a related move, Loveman had his contract renewed through 2016.