Asset transfers called fraudulent
The court-appointed examiner in the bankruptcy case of Caesars Entertainment’s largest operating unit has reported that several transfers of assets prior to the bankruptcy filing of Caesars Entertainment Operating Company (CEOC) were fraudulent.
In so finding, the examiner’s non-binding report agrees with the arguments of lower-level creditors who have filed several lawsuits against parent Caesars Entertainment and its owners, private equity firms Apollo Global Management and TPG Capital—that Caesars stripped many of its most valuable properties from CEOC to protect them from creditors prior to the bankruptcy.
Caesars also unilaterally canceled a repayment guarantee on the lower-level debt, electing not to make an interest payment in December 2014. The bankruptcy was filed a month later.
U.S. Bankruptcy Judge Benjamin Goldgar had stayed any progress on the creditor lawsuits involving the asset transfers until the examiner—former Watergate investigator Richard Davis—issued his report. With the 1,700-page report complete after a full year of investigation, the lawsuits may now go forward as of May 9, with potential damages of $5.1 billion to cover the debt of second-tier bondholders led by the Appaloosa Management hedge fund.
Davis reported that while none of the asset transfers constituted criminal fraud, they did constitute a breach of Caesars’ fiduciary duties involving the operating unit’s debt. The initial restructuring plan submitted in the CEOC bankruptcy, negotiated over several months with first-lien bondholders, hinged on the asset transfers in its promise to eliminate $10 billion of CEOC’s stifling $18 billion in debt.
Caesars Entertainment officials released a statement last week saying it disagreed with Davis’ conclusions, defending the transactions as adding “immense and indisputable benefit to CEOC and its creditors.” Apollo made its own comments in a statement emailed to Reuters saying, “We believe that Apollo acted appropriately and in good faith to help CEOC strengthen its capital structure.”
CEOC issued a separate statement saying it plans to resume negotiations with creditors and submit an updated restructuring plan. Parent Caesars Entertainment previously offered to inject $1.5 billon into CEOC to settle the asset-stripping allegations.
Should Caesars fail to reach a settlement agreement with the second-tier creditors of CEOC, the parent company could be forced into Chapter 11 bankruptcy.
Davis reported that TPG and Apollo instituted the asset transfers as part of a strategy to protect their own positions as far back as 2012, and that evidence shows the operating unit was insolvent as early as 2008.
“In assessing the actions of CEC and the sponsors (TPG and Apollo), it is important to remember that the sponsors are among the most financially savvy investors in the country,” Davis wrote.
Caesars stock fell 13.47 percent to $6.23 the day after the report was issued.
Coincidentally, the Nevada Gaming Commission last week approved a gaming license for the first time to new Caesars CEO Mark Frissora. While they questioned Frissora about the bankruptcy and the revelations in the report, they voted unanimously to license Frissora, saying that the bankruptcy had nothing to do with the suitability hearing.
