Lawsuits involve bondholders’ July default notice and Caesars’ attempts to restructure debt
Caesars Entertainment Corporation, which is in negotiations with a group of senior bondholders in an attempt to refinance a large portion of the operator’s suffocating debt load, has traded lawsuits with a group of holders of second-lien notes who Caesars officials say are hampering negotiations with the senior group.
The bondholders filed suit against Caesars last week in Delaware, and Caesars responded with a counter-suit in New York against the note holders, which include institutional investors who are trying to block debt-restructuring efforts they say will leave them holding the bag on $1 billion worth of second-lien notes.
The group of defendants in the suit filed by Caesars includes one first-lien note-holder, Elliott Management Corporation, which Caesars’ complaint claims has the “greatest ulterior motive” in seeing that Caesars defaults on its debt. Caesars officials said the investors are trying to push Caesars into default while the company tries to make capital transactions that will improve the company’s financial condition.
Caesars assumed $30 billion of debt as a result of its buyout in 2008 by Apollo Global Management LLC and TPG Capital. The company now carries $21 billion in debt, and with profits down since the recession hit shortly after the buyout, the company has struggled to meet interest payments. In June, holders of the company’s second-lien debt sent the operator a default notice.
According to a report in Bloomberg, investors who own portions of Caesars’ $6.35 billion of first-lien bonds are talking to the operator on a plan to restructure about $19 billion in debt currently carried by Caesars’ operating company. The senior bondholders are reportedly negotiating terms that would afford some flexibility in paying a $3 billion interest payment.
The lower-level creditors object to Caesars’ sale of its own assets to a trust division they say is designed to shield the company from creditor seizure in case of a default.
Caesars sold several of its most valuable assets—including Harrah’s New Orleans, Planet Hollywood and Bally’s Las Vegas—to subsidiary Caesars Growth Partners, a real estate investment trust that puts the assets out of reach of creditors. This move also allowed the operator to remove the guarantee from lower-level debt.
The current negotiations could pave the way for a bankruptcy of the operating company, according to one bondholder representative. “The financing transaction will, in our view, ultimately pave the road for CEOC’s bankruptcy rather than forestall it,” Sidney Levinson, a Jones Day attorney who represents holders of $1 billion of the unit’s second-lien notes, told Illinois Gaming Board members last month.
Fitch Ratings reported on July 30 that second-tier bondholders are likely to get no more than 20 percent of their debts’ face value—if anything at all—under Caesars’ new debt structure.
“The company is negotiating with first-lien holders and they’re going back and forth suggesting new structures,” John Kempf, an analyst at RBC Capital Markets, told Bloomberg. “The question is, will the second-liens agree to this?”
The answer to that question came last week, when Wilmington Savings Fund Society, a trustee for holders of 10 percent notes payable in 2018, sued the company in Delaware Chancery court in Wilmington, accusing it of fraudulently transferring assets as part of the restructuring and wasting assets.
The trustee lawsuit alleges that Caesars officials “have made clear they have no intention of preserving the value” of the gaming company “or otherwise protecting the interests of creditors,” and further claims Caesars transferred its online gambling business, which the company valued at $779 million, from the operating company to the parent company in 2011 “for little or no consideration.”
According to the bondholders’ lawsuit, the effect of those transactions and others—including transfer of the Linq shopping mall to the affiliate in exchange for assumption of $450 million in bank debt—was the splitting of the operator into a “Good Caesars” and a “Bad Caesars,” to the detriment of lower-level shareholders.
Caesars answered the trustee lawsuit, which seeks an order to halt the debt restructuring efforts, with the New York lawsuit, seeking to preserve the efforts.
“We refuse to be held hostage by speculators who appear to be betting against the long-term health of our enterprise as well as our more than 60,000 employees and the communities in which we operate,” Caesars CEO Gary Loveman said in a statement. “The meritless actions taken by the defendants impede our ability to conduct rational negotiations with holders to further improve (the operating company’s) financial condition.”
Meanwhile, Caesars named top officers to lead its operating unit in anticipation of a new stock listing and debt restructuring. John Payne was named chief executive officer of Caesars Entertainment Operating Co., Mary Elizabeth Higgins was named chief financial officer and Tim Lambert was named general counsel.
The move is regarded as a precursor to an offering of equity through public stock.
“We are focused on deleveraging and creating value at CEOC, and today’s announcement supports those goals,” Loveman said in a statement.
