Restructuring moves called illegal
Caesars Entertainment officials are playing down the significance of a ruling in a lawsuit by second-tier creditors that some say could derail its restructuring plan currently before U.S. bankruptcy court. Whatever happens, according to one ratings service, it will be a “drawn-out process.”
The operator placed its largest operating unit, Caesars Entertainment Operating Company (CEOC) into Chapter 11 bankruptcy in Chicago on January 15, after a large majority of senior-level creditors approved a restructuring plan that would eliminate nearly $10 billion of the unit’s $18.4 billion in debt. A lawsuit by second-tier creditors filed in New York claims the restructuring plan essentially leaves them holding the bag for more than $5 billion in debt.
The same day as the Chicago bankruptcy filing, the judge in the New York lawsuit agreed with the lower-level creditors. U.S. District Judge Shira Scheindlin, after rejecting Caesars’ motion to dismiss the lawsuit, held that the transfer of top assets including the operator’s largest resorts from CEOC to real estate investment trust Caesars Growth Partners, a key move in the restructuring plan, was illegal.
Scheindlin said the transfers and the related removal of guarantees to creditors violate the federal Trust Indenture Act of 1939. The resulting restructuring plan would result in first-lien bondholders recovering 92 percent of their investment, while junior note holders would receive less than $549 million on their $5.245 billion in second-lien notes—which Scheindlin called an “impermissible out-of-court restructuring” that is exactly what the 1939 law was meant to prevent.
“CEC’s ultimate plan is to push CEOC into bankruptcy while protecting Apollo and TPG from CEOC’s creditors,” said Scheindlin.
Caesars plans to appeal the ruling, but needs the judge’s permission, since the ruling itself did not completely dispose of the lawsuit. In a statement issued to Bloomberg Businessweek, Caesars spokesman Stephen Cohen said the ruling was “based simply on the plaintiffs’ allegations,” and is “inconsistent with the provisions of the Trust Indenture Act.”
Cohen went on to say the ruling will not derail the CEOC bankruptcy. “Given the size of the claims at issue and our strong defenses, we do not expect the ruling to impact the planned reorganization,” he said.
The restructuring plan, which is based on the new corporate structure resulting from those transfers, could itself be ruled invalid by the Chicago bankruptcy court, based on this ruling.
The second-lien creditors also filed an involuntary bankruptcy petition in Delaware against CEOC three days before the operator’s Chicago filing. The judge in that case has yet to rule on Caesars’ motion to dismiss due to jurisdictional questions.
The Chicago judge granted CEOC’s request to continue with business as usual until the restructuring is approved, and answered other minor motions. However, any decision on the larger restructuring will be on hold until the Delaware judge decides whether the involuntary bankruptcy case can move forward.
When two bankruptcies for the same company are sought in different jurisdictions, the judge in the case that was filed first determines where they will be heard. U.S. Bankruptcy Judge Kevin Gross in Wilmington said he would like to hold a trial this month over that question.
U.S. Bankruptcy Judge Benjamin Goldgar in Chicago stated that he didn’t want to exceed the authority granted to him by his counterpart in Delaware.
The lower-level creditors filed the New York lawsuit in September, just weeks after the transactions in which CEOC transferred assets to the REIT, out of the reach of note holders, and the parent Caesars Entertainment canceled its guarantee of the debt.
The plaintiffs say Section 316 of the Trust Indenture Act prevented CEOC from removing the guarantee without consent of the note holders.
Caesars’ reorganization protects Apollo Management LP and TPG, Inc., which acquired Caesars in a $30 billion leveraged buyout in 2008, by putting the operating unit and its affiliates in bankruptcy while keeping out the parent, Caesars Entertainment Corp. The company negotiated with senior bondholders for four months, while lower-level creditors complained they were left out of the negotiations.
Analysts predict a long legal battle over Caesars’ bankruptcy. “This is going to be a long and contentious, protracted process,” said Alex Bumazhny, a financial analyst for Fitch Ratings, in an interview with Vegas Inc. “There are going to be a lot of creditors with a lot of incentive to push back very hard on this attempt to basically retain the equity for this company,” Michael Friedman, a partner at Chapman & Cutler LLP, told Bloomberg.
The operating unit listed about $12.4 billion in assets and $19.9 billion in liabilities in Chapter 11 documents in Chicago.
In Atlantic City, the bankruptcy has fueled speculation that Caesars could close another of its three properties in the struggling market. Two of the company’s three Atlantic City casinos, Bally’s and Caesars Atlantic City, are owned by CEOC. (Harrah’s Atlantic City is owned by a separate division.) Of those two, the weaker Bally’s would be the likely candidate to become the fifth Atlantic City casino to close within a year.
Meanwhile, Fitch Ratings Service analyst Alex Bumazhny says the plan won’t be a “simple fix.”
“We continue to hold that the CEOC bankruptcy will be protracted given the complexity of the capital structure, the inter-company asset transfers and sales and the contentious dealings with creditors to date,” Bumazhny said.
