Caesars Falls 50% on Court Ruling That May Spur Bankruptcy

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Caesars Entertainment Corp. may be forced to make major financial concessions to creditors to avoid bankruptcy after a judge said the casino company must face lawsuits with the potential to cost billions more than it can afford.

The ruling by U.S. Bankruptcy Judge A. Benjamin Goldgar in Chicago on Wednesday deprives the casino giant of breathing room it sought to get its financial house in order after taking on massive debts in a $30.7 billion leveraged buyout.

The shares dropped 41 percent.

While Caesars’ main operating unit, which filed for bankruptcy in January, is shielded through an automatic stay of most litigation, the parent is not, Goldgar said.

“The company lost a negotiating chip,” Erik Gordon, a law professor at the University of Michigan’s business school, said. “They will try to chug forward with a plan. That’s going to be a very rough road full of potholes because so far they’ve not been able to get the creditors together.”

The creditors have accused Las Vegas-based Caesars of saddling the bankrupt unit with too much debt and too few assets, while the company’s private-equity owners, including Apollo Global Management and TPG Capital, seek to retain control of the more valuable parts of the company.

Shares Plunge

Caesars shares fell 41 percent to $4.76 in New York trading Wednesday, after plunging as much as 59 percent. The stock is down 70 percent this year.

Wednesday’s ruling may give creditors including Appaloosa Management, Oaktree Capital Group, Tennenbaum Capital Partners and Centerbridge Partners more leverage in talks on a reorganization plan.

Those funds, which hold more than $1 billion in the company’s so-called second-lien debt, have been Caesars’ main opponents in the bankruptcy. Second-lien bonds jumped after the ruling.

Caesars has been trying to persuade investors holding more than 50 percent of the second-lien debt to sign a restructuring agreement that would pay them less than they are owed while still leaving Apollo and TPG with ownership stakes.

Should more than 50 percent of the second-liens agree, they might try to order the trustee behind the most threatening lawsuit in New York to drop the case, Julia Winters, an analyst at Bloomberg Intelligence, said.

Hard Task

Getting there, however, may be very difficult using Caesars’ current offer, which is known as a restructuring support agreement, said Winters, a former bankruptcy lawyer.

“I think the current RSA construct won’t woo the seconds with incremental improvements, now that they see $12 billion in guarantee claims on the horizon,” Winters said.

That means Caesars’ owners will need to trade more of their equity to creditors in exchange for eliminating debt, she said.

It may be time for Apollo and TPG to drop their aggressive tactics, Gordon said.

“They’re not going to come away with as much as they keep pushing for,” he said. “They keep getting slapped down.”

In at least four lawsuits, creditors or a trustee representing them allege that the parent company is obligated to guarantee notes issued by the bankrupt Caesars Entertainment Operating Co., which is trying to eliminate about half its debt of almost $20 billion.

Bankruptcy Threat

If the creditors prevail in one of the cases, Caesars might be compelled to cover the unit’s debts. There wouldn’t be enough money to pay a multibillion-dollar judgment and the company might be forced into bankruptcy, a financial adviser for the operating company has testified.

The operating unit argued that temporarily halting the lawsuits would permit it to keep negotiating with creditors in hopes of winning enough support for a plan that would allow it to exit Chapter 11.

Goldgar denied the operating unit’s request, citing a list of legal precedents that he said argued against extending any protection to the parent.

The lawsuits attack restructuring actions Caesars took in the years before the operating unit’s bankruptcy, including transferring assets and stripping noteholders of guarantees that the parent would repay the unit’s debts.

Creditors claim those actions were designed to protect the private-equity owners, Apollo and TPG.

Leon Black

Apollo, run by billionaire Leon Black, along with TPG and co-investors put up $4.4 billion of equity for Caesars’ buyout, which was struck before the credit crisis unfolded in 2008.

In 2013, Apollo and TPG injected at least $600 million in Caesars Growth Partners LLC, a group of casinos spun out of the company that year.

In some of the lawsuits, lower-priority creditors accused company officials of intentionally creating a “good Caesars” with valuable assets and lower debt and a “bad Caesars” that would be put into bankruptcy, where debts can be wiped out.

Caesars denies the allegations, arguing that its actions were legal and necessary.

The company and the creditors will now focus on a lawsuit in Manhattan that is in the most advanced stages.

In a preliminary ruling, U.S. District Judge Shira Scheindlin has already said Caesars’ creditors can seek a quicker-than-normal decision on whether the company violated federal law.

‘Strong’ Defenses

“We believe our defenses in the New York litigation are strong, and will continue to contest those cases vigorously,” Stephen Cohen, a company spokesman, said. “The bankruptcy court’s ruling was a technical interpretation of bankruptcy law and did not address in any way the merits of the New York litigation.”

Caesars has tried for months to persuade various groups of senior and junior creditors to sign a restructuring support agreement that would allow Apollo and TPG to retain a stake in the operating unit and permanently halt the lawsuits.

In most bankruptcy cases, company owners can’t retain any equity until they repay all debt in full. Caesars is pushing to be among the rare exceptions to that rule.

Almost all of the lowest-ranking creditors, who hold unsecured debt that’s not backed by any collateral, have rejected the offer.

First-lien bondholders and other higher-ranked creditors are divided. A majority of the senior bondholders signed the restructuring support agreement, while other creditors have so far refused.

Non-Signers

A majority of Caesars’ most senior lenders, investors who hold $2.8 billion out of $5.4 billion in guaranteed bank debt, plus junior-ranked creditors, haven’t signed the agreement, according to court filings.

The operating unit’s largest second-lien bond, $3.6 billion of 10 percent notes due in 2018, climbed 4.5 cents to 32.8 cents on the dollar at 3:44 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Some second-lien bondholders who also are major shareholders in Caesars have agreed to the restructuring proposal. Caesars reached an agreement Monday with a group that includes Paulson & Co., Canyon Partners and Soros Fund Management, who are among the top 10 shareholders. They saw the value of their shares plunge Wednesday while the value of their bonds rose.

The bankruptcy is In re Caesars Entertainment Operating Co., 15-bk-01145, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

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