A Delaware Chancery Court judge said last week he will rule soon on a motion by Caesars Entertainment attorneys to dismiss a lawsuit brought against Caesars by a group of second-lien bondholders who allege the operator fraudulently moved assets into a REIT to avoid paying their debt.
Vice Chancellor Sam Glasscock, after the opening hearing in the lawsuit—one of three surrounding the operator’s restructuring efforts—told the parties he needs to weigh the case’s complex issues before issuing a ruling. The bondholders, who are owed around $3.6 billion of Caesars’ staggering $25 billion in debt, allege that Caesars’ move of most of its most valuable assets from Caesars Entertainment Operating Company (CEOC)—the unit holding most of the operator’s debt—into the REIT was a deliberate attempt to shield assets including its largest casinos from bankruptcy seizure should the company be placed into receivership.
The case was initiated by the trustee of Wilmington Savings Fund Society (WSFS) in Delaware, which sued claiming the operator’s restructuring is essentially creating a “good Caesars” with lower debt while the “bad Caesars” goes into bankruptcy. Caesars filed a counter-suit in New York seeking to affirm the legality of its moves, and alleging the junior bondholders are deliberately trying to sabotage the operator’s restructuring efforts.
Caesars attorneys are seeking dismissal on the grounds that the second-lien bondholders are bound by an inter-creditor agreement with first-lien bondholders that requires such claims be filed in New York. “They have a contractual obligation to bring this case in New York,” said Caesars attorney Eric Seiler.
WSFS lawyers claim they are not party to the inter-creditor agreement, because the asset transfers in dispute involved entities that were formed in Delaware and are controlled by Caesars in Nevada.
“The important and central witnesses are going to be the business people who signed off on these transfers,” argued Bruce Bennett, an attorney for the bondholders.
The case is the first of two brought against Caesars by junior bondholders. The plaintiffs in the other case allege Caesars is deliberately excluding a from debt refinancing negotiations with senior creditors, ongoing for the past two months. They say they will be left holding the bag for billions after Caesars’ expected prearranged January bankruptcy.
JP Morgan analysts reported last week that CEOC will likely skip a $224 million interest payment owed this week to junior bondholders as its paves the way for the January bankruptcy filing.
A third lawsuit was brought by holders of $1.25 billion of first-lien notes, seeking to force CEOC into receivership. The senior creditors also filed a default notice with the federal Securities and Exchange Commission, claiming that the operator broke an agreement when selling and transferring assets.
The plaintiffs in that case allege that 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.”
Glasscock said he will rule promptly on the dismissal motion, but gave no timeline.
Meanwhile, a Bloomberg report cited unnamed sources as saying Elliott Management Corporation, the hedge fund run by Paul Singer, one of Caesars biggest bondholders, has been adding to derivatives trades that would pay off if Caesars defaults as the hedge fund helps orchestrate a bankruptcy plan.
Singer bought credit-default swaps before entering negotiations with Caesars in September and has continued to purchase the derivatives, according to the report.
