REIT transactions will be investigated
A Chicago U.S. bankruptcy judge has denied the motion of Caesars Entertainment Corporation to eliminate the one of two creditor panels created by the U.S. Justice Department that is fighting to invalidate key transactions that led to the operator’s deal with first-lien bondholders on its debt restructuring plan.
The Justice Department’s Office of the U.S. Trustee appointed two committees of debt-holders to have standing in the Chapter 11 proceedings of its largest unit, Caesars Entertainment Operating Company (CEOC). One panel is dominated by debtors such as suppliers who have ongoing relationships with the operator, and is likely to approve the restructuring that will ensure the operator’s continued health.
The other panel represents second-lien bondholders, many of whom are suing the operator over financial transactions that set up an operating structure favorable to a plan to restructure senior-level debt. That plan was the result of four months of negotiations between CEOC and first-lien bondholders that resulted in the primary restructuring plan before the bankruptcy judge.
Caesars made a motion to disband the panel representing second-lien bondholders, arguing that it is duplicative and a waste of money to CEOC, which under federal bankruptcy rules must pay the expenses incurred by the panels in their investigation of matters related to the claim. Last week, Chicago U.S. Bankruptcy Judge Benjamin Goldgar denied Caesars’ motion, on the basis he does not have jurisdiction to overturn a panel appointment made by the U.S. Trustee.
The ruling handed Caesars its first real setback in the bankruptcy trial, after winning its previous motions, including an important decision to hold the trial in Chicago, as opposed to New York City, where second-lien bondholders filed a motion for involuntary bankruptcy a few days after the operator filed in Chicago January 15.
The preservation of the panel representing lower-level bondholders means the committee is free to investigate the real estate transactions the second-lien bondholders claim are illegal, including placement of major assets such as Planet Hollywood, Bally’s Atlantic City and Caesars Atlantic City into a real-estate investment trust that put them out of reach of the lower-level creditors in a bankruptcy claim.
It also means the panel will likely investigate whether it was legal for Caesars to unilaterally cancel a repayment guarantee the creditors claim was in their original contract, which CEOC denies. Caesars chose to discontinue interest payments on the lower-level debt in December, prompting two requests for immediate repayment in full of some $5 billion in debt—requests CEOC simply denied, while under Chapter 11 protection.
Caesars also has requested that any probe by examiners representing the second-lien creditors be limited as far as investigative and legal costs. Goldgar has yet to rule on that motion.
Goldgar did rule last week that CEOC can tap some of the $847 million in cash it has on hand to fund ongoing operations at its casino properties. The judge granted permission over objections from some of the creditors to spend $334 million through April 3 on operations. Goldgar granted creditors’ request to rehear the motion, which he will do on March 26.
At stake is the deal CEOC hammered out with creditors that would eliminate $10 billion of its $18 billion in debt, and return 90 percent of the investment of first-lien bondholders. Lower-level creditors complain they were left out of the negotiations and as a result will be left holding the bag for most of their debt. Overall, Caesars debt—an industry-topping $25 billion—would be halved under the restructuring, dropping annual debt expense from $1.7 billion to around $450 million.
Meanwhile, Caesars is making moves to divest assets and cancel contracts to free up cash. On February 26, the company announced it had sold its 20 percent interest in three Ohio properties—the Horseshoe properties in Cleveland and Cincinnati, and Thistledown Racino—to partner Rock Gaming. (Caesars will continue to manage the properties.) That sale also included partial ownership of the Ritz-Carlton and historic Higbee’s Department Store building in Cleveland, where the Horseshoe is located.
The company also is seeking to get our from contracts costing $675,000 per month, including a suite for Kansas City Chiefs football games, a sponsorship with the New York Mets, and advertising agreement with the Forum in Los Angeles, and assorted bus tour and room contracts.
It also came to light last week that many retired Caesars employees will lose retirement income because of the restructuring. Affected employees were notified at the time of the January Chapter 11 filing that the company will now longer make payments under a Supplemental Employee Retirement Plan. A Caesars official told the Las Vegas Review Journal that fewer than 50 retired employees fall under the affected plans. The restructuring will not affect 401(k) retirement plans.
An attorney for CEOC told Bloomberg last week that the company is looking into the issue of retirees losing their pension. “The issue will be addressed in a manner that is legal, fair and equitable by the company,” said Steven Pesner, who is a partner with Akin Gump Strauss Hauer & Feld. “There are equitable considerations to be made. This is being looked at seriously.”
It is not the only pension issue with which Caesars is dealing. The operator revealed in court papers last week that the National Retirement Fund has expelled Caesars’ three Atlantic City casinos from its multi-employer pension plan, and has demanded the operator pay $462 million in withdrawal fees. The organization expelled the properties and sought withdrawal fees in anticipation of the operator not being able to meet its obligations while in bankruptcy.
In an interview with the Press of Atlantic City, Bob McDevitt, president of UNITE HERE Local 54, the main casino employee union in Atlantic City, called the action “a dumb move by some trustees on the fund who really weren’t thinking things through.” McDevitt noted that Caesar Entertainment was never behind on its payments into the fund, and the preemptive dumping of the company was “unnecessary, premature, and irrational.”
Caesars has struggled with debt since it was taken private in 2008 by Apollo Global Management and TPG Capital for $30.7 billion.
