Ruling hands loss to second-lien bondholders
A federal bankruptcy court judge in Wilmington, Delaware has ordered that the Chapter 11 bankruptcy case of Caesars Entertainment Operating Company (CEOC) be heard by the U.S. bankruptcy court in Chicago, where Caesars filed its prepackaged bankruptcy reorganization plan on January 15.
The ruling is a big win for Caesars, which has been at odds with second-lien creditors while pushing a financial restructuring agreement it reached with most of its first-lien bondholders.
U.S. Bankruptcy Judge Kevin Gross made his ruling after a two-day hearing in Wilmington, Delaware, where an involuntary bankruptcy petition was filed against CEOC parent Caesars Entertainment Corp. by second-lien creditors seeking to protect their investment three days before CEOC, the company’s largest operating unit and holder of the majority of the operator’s $25 in debt, filed in Chicago.
U.S. Bankruptcy Judge A. Benjamin Goldjar will now hear the Chicago bankruptcy petition, which centers around the CEOC restructuring plan. The plan, the result of four months of negotiations between Caesars and its first-lien noteholders, would reduce CEOC’s debt from more than $18 billion to around $8 billion.
“Ultimately, the overriding consideration is that the debtors chose the Illinois court,” Gross said in his decision deferring the case to his Chicago counterpart. Letting the creditors win would be “bad precedent,” he said. “The involuntary petition was clearly an anticipatory filing,” he wrote, noting that the lower-level creditors knew Caesars would be filing its own petition days later, and “raced to the courthouse.”
The restructuring of first-lien debt at the heart of the reorganization plan on which Goldjar will rule also is the subject of two lawsuits from lower-level creditors who claim Caesars made illegal transfers of assets designed to favor top bondholders while relieving Caesars’ private-equity owners, Apollo Global Management and TPG Capital, of responsibility to repay around $5 billion in second-lien notes.
The petition for involuntary bankruptcy would have involved all Caesars divisions, including the ones to which the lower-level debt was transferred to form the basis of the restructuring plan. If that plan had become the basis of the bankruptcy, the second-lien creditors would likely receive have gotten more for their investments than the approximate 10 percent payoff contemplated in the Chicago petition.
Under federal law, when separate bankruptcy petitions are filed, the judge in the petition filed first has the right to decide which case moves forward.
The involuntary petition was filed by a coalition of junior and senior creditors, whose attorneys argued that Wilmington was the logical venue for the bankruptcy because so many of the creditors consist of hedge funds based on the East Coast, and because so much of Caesars’ business is centered there.
Caesars attorneys argued that it has key resorts in the Midwest and that Chicago is closer to its headquarters in Las Vegas.
However, the truth is that key issues in the case will be affected by the venue. Now, junior-level creditors will not be able to use the bankruptcy hearings to contest the transfers of assets that ultimately will protect Apollo and TPG from asset seizures to pay off second-lien creditors. The Delaware would have made the entire restructuring plan negotiated between CEOC and first-lien bondholders subject to scrutiny and possible change or rejection.
The asset transfers, which moved resorts including Planet Hollywood in Las Vegas to a real-estate investment trust and out of reach of creditors, will have to be challenged through the lawsuits, success of which now hinges on how fast CEOC’s bankruptcy petition is approved by the Chicago judge. Once the bankruptcy plan is approved, all lawsuits against the operator are vacated.
Some analysts have speculated that Caesars may want the Chicago venue because federal courts there have generally applied a looser standard than Delaware when it comes to releasing company affiliates and insiders from liability in a bankruptcy case.
In one of those cases, a New York district judge held Caesars’ transactions prior to the restructuring—and in particular the operator’s cancellation of repayment guarantees without the creditors’ approval—were illegal, without dismissing the lawsuit.
Gross, in making his ruling, did not let Caesars completely off the hook on the suspect asset transfers, saying in his ruling that while precedent “narrowly supports” moving the case to Chicago, the conduct of Caesars officials in forming the plan “on its face is suspect.” He cited the New York ruling in 3riting that the Illinois judge should put Caesars “under a magnifying glass” and not allow company officials out of their fiduciary duties “should those facts come to the court’s attention.”
In another lawsuit, owners of about $2.9 billion in senior debt allege that Caesars tried to buy their votes in the restructuring negotiations. Lenders including GSO Capital Partners LP, Silver Point Capital LP and BlackRock Financial Management Inc. say they were offered a $150 million fee to consent to the company’s proposed refinancing plan, which ultimately was approved by a large majority of noteholders.
The noteholders are asking the court for an order barring Caesars from handing out fees to obtain votes. “Defendants are attempting to subvert the plan and disclosure statement process,” the lenders told the judge in the filing.
