A group of holders of .25 billion of first-lien notes for Caesars Entertainment Corporation has sued the operator in Delaware Chancery Court, seeking to force its largest operating unit, Caesars Entertainment Operating Company (CEOC), into receivership.
The senior creditors, which previously walked out of negotiations on the restructuring of the majority of the operator’s industry-leading $25.5 billion of debt, also filed a default notice with the federal Securities and Exchange Commission, claiming that the operator broke an agreement when selling and transferring assets.
It is the first time a group of senior creditors has claimed default against Caesars since the operator began negotiations to restructure the majority of its debt two months ago. Two groups of second-lien noteholders previously filed default notices, protesting that they were left out of the restructuring negotiations.
The lawsuit was filed by UMB Bank NA, alleging, “This is a case of unimaginably brazen corporate looting and abuse perpetrated by irreparably conflicted management.”
Caesars spokesman Stephen Cohen of Teneo Strategy, told TheStreet.com, “We believe the claims in this lawsuit are baseless and that this filing is an attempt to derail constructive talks that the company is having concerning a restructuring of CEOC and we will defend ourselves vigorously.”
Meanwhile, the holders of the majority of the senior bonds have agreed with the operator’s plan to split the company into two groups, with a real-estate investment trust owning the properties and an operational group leasing from the REIT. The move would increase the value of CEOC, providing more cash for senior investors while protecting major assets—CEOC owns most of Caesars’ major hotel-casinos—from seizure in a bankruptcy proceeding.
According to a Bloomberg report, holders of Caesars’ term loans have agreed to the reorganization plan, which already had the support of the majority of senior bondholders. The plan would place CEOC into bankruptcy as soon as January 14, after which it would emerge as a REIT.
Last week’s lawsuit claims the leaders of TPG Capital and Apollo Global Management LLC, the private hedge funds that bought out Caesars in 2008 for $30.7 billion—the move just before the height of the recession which ultimately led to the current debt crisis—“thoroughly ransacked CEOC in a sweeping and now transparent plan to take CEOC’s prime assets for themselves and leave its liabilities and creditors behind.” The suit says TPG co-founder David Bonderman and Apollo chief Marc Rowan looted the operator for the value of its top hotel-casino assets.
The default notice was sent November 21, after holders of $1.25 billion in first-lien bonds, headed by UMB Bank, learned of Caesars’ plan to split its company in two.
CEOC owes $18.4 billion of Caesars’ $25.5 billion debt load.
Caesars has said CEOC will not have enough cash to make interest payments in the fourth quarter of 2015 if it can’t restructure its debt through negotiations, refinancing and, ultimately, the pre-arranged bankruptcy in January. The creditors battling the restructuring plan claim that it will preserve the company’s most valuable assets while leaving them holding the bag for billions in debt.
Caesars filed its own notice with the SEC calling the default notice “meritless.” In its filing, Caesars said it “does not believe that a default or an event of default has occurred.”
Caesars’ $1.25 billion of 8.5 percent, first-lien notes due February 2020, the securities identified in the default notice, traded at 76.8 cents on the dollar November 14 to yield 15.06 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Two analysts filed reports last week that were positive on Caesars’ plan to spin off assets into a REIT, a move that has several precedents in the gaming industry. “Such a maneuver, if executed, can increase CEOC’s value by an estimated 13 percent,” Fitch gaming analyst Michael Paladino said in a report to investors. “With the company’s cash, CEOC could be worth roughly $11 billion, compared with $9.7 billion without the spinoff.”
KDP Investment Advisors gaming analyst Barbara Cappaert said in a research note the value returned to first-lien bondholders “would come on the backs of more junior creditors,” as it would save the company from an interest payment on the notes due next month. “This would save the company just over $260 million, which could be used in the bucket of value available for the entire restructuring,” Cappaert said.
According to the SEC filing on the REIT move, first-lien bondholders would receive 93.8 percent recovery on their investment through the REIT. Second-lien and unsecured bondholders would receive a minimum amount of equity, but they would have to “vote as a class in favor of the restructuring.”
Both analysts added that the REIT split would not prevent a bankruptcy. “Ultimately, we continue to hold that a lengthy bankruptcy process is a more likely route,” Paladino said. “Our view reflects the complexity of Caesars’ capital structure, the subjective nature of valuing CEOC and pending lawsuits.”
