WEEKLY FEATURE: Caesars Bankruptcy Gets Dicey

The judge in the bankruptcy case of Caesars Entertainment’s largest operating unit has ordered an independent examiner to investigate transactions related to the restructuring. He refused to dismiss a Delaware lawsuit that charged Caesars with questionable business practices.

The judge in the bankruptcy case of Caesars Entertainment Operating Company (CEOC) has ordered an independent examiner to investigation several real estate transactions that set the stage for a restructuring deal between Caesars and first-lien bondholders.

The transactions, which are the subject of two lawsuits by lower-level bondholders, have been assailed by second-lien creditors as moves intended to leave them out of the restructuring talks and leave them holding the bag for more than $5 billion in debt. U.S. Bankruptcy Judge Benjamin Goldgar directed the independent examiner to investigate “any apparent self-dealing or conflicts of interest involving the debtors or their affiliates.”

Among the transactions in question are several moves by Caesars’ private-equity owners, Apollo Global Management and TPG Capital Management, placing major assets such as Planet Hollywood, Bally’s Las Vegas and the Quad (now the Linq) into a real-estate investment trust, preventing them from being seized against second-lien debt.

The moves led to four months of negotiations between CEOC and senior bondholders that resulted in the restructuring plan presented to the bankruptcy judge. The restructuring would eliminate $10 billion of CEOC’s $18 billion in debt, which is the largest chunk of the operator’s industry-leading $25 billion of indebtedness.

Caesars also unilaterally canceled a repayment guarantee in relation to lower-level debt, including three monthly interest payments, which Caesars has refused to pay.

Caesars maintains that all asset transfers were for fair value, and were legal moves that will result in senior-level bondholders recovering the vast majority of their investment.

Caesars is paying for the investigation, which is expected to cost tens of millions of dollars. Additionally, the operator warned in a regulatory filing last week that finding the transactions improper—potentially torpedoing the hard-fought restructuring plan—would endanger the operators’ ability to continue as a going concern, as it “could have a material adverse effect on our business, financial condition, results of operations and cash flows.”

The “material uncertainty” over the litigation “raises substantial doubt about the company’s ability to continue as a going concern,” the filing said.

Two lawsuits deal directly with the suspect transactions. In yet another setback for Caesars last week, a Delaware judge refused to dismiss one of those lawsuits. The suit, brought by Wilmington Savings Fund Society as trustee for the holders of second-lien notes, singles out the transfer of assets as fraudulent, alleging that the moves were designed to shield Apollo Global and TPG Capital from more than $3.6 billion owed to the plaintiffs.

The judge rejected Caesars’ argument in its motion for dismissal that the plaintiffs were contractually bound to file suit on the transactions in New York rather than Delaware.

In addition, Goldgar granted Caesars permission to cancel contracts with the Kansas City Chiefs for a corporate suite at the stadium, a room reservation agreement with a Springhill Suites hotel in Louisiana and a merchandise agreement with audio company Monster Inc.

Those cancellations will save the company around $350,000 per month. The judge held that the operator’s other cancellation requests—for $203,000 a month in advertising at the New York Mets’ stadium, $60,000 a month in advertising at the Los Angeles Forum and a bus deal with a motor coach company in Louisiana costing $90,000 a month—were not filed with sufficient notice to the companies involved, and will have to be filed again.

Meanwhile, the Wall Street Journal reported that the biggest prize in any Caesars bankruptcy are the 45 million members of the company’s pace-setting Total Rewards loyalty program. That’s why the creditors are so upset about a transaction placing the Total Rewards program into a separate company. In a February court filing, the junior creditors alleged that the transfer of “virtually all of the attributes of ownership and control of Total Rewards” from the now-bankrupt unit to the Caesars parent company was crippling.

In a statement, Caesars defended the transactions.

“The structure the Caesars companies established ensures that Total Rewards will have the resources it needs for maintenance and growth, that the program is available on fair terms to every Caesars-affiliated property, including (the now-bankrupt entity), and that each of the Caesars companies makes a fair contribution to the expenses of the system.” The company also said the operations of the program have not been affected.