• Bankruptcy judge loses patience: ‘We’re 20 months into this’
  • $5.5 billion in bondholder claims push casino giant to brink

As the judge sees it, there’s about $1.2 billion standing between bankrupt Caesars Entertainment Operating Co. and a deal to get it out of Chapter 11. 

What exasperates the bankruptcy judge, A. Benjamin Goldgar, is how long it’s taken the casino giant to go looking for the money where it’s most likely to be found: with the private equity firms that creditors blame for exacerbating the company’s woes.

“We’re 20 months into this,” Goldgar told a company financial strategist at an Aug. 23 hearing. “How could this not have occurred to somebody until just in the past few weeks?”

Goldgar expressed astonishment that the operating company waited until early August to seek help from its indirect owners, Apollo Global Management LLC and TPG Capital. After all, Goldgar said, an investigation he ordered last year found the firms are potentially liable for $5.1 billion in damages related to the bankruptcy, which was filed in January 2015. 

His solution: Lift a ban on bondholder lawsuits against parent Caesars Entertainment Corp. and its owners. So, rather than be forced to accept a restructuring plan that releases Apollo and TPG from liability, creditors now may get their day in court and potentially push the non-bankrupt parent into Chapter 11 alongside the operating unit. 

Wipe Out

Bankruptcy could erase the value of Caesars’s shares, including the 60 percent stake held by the private equity firms, which took over the Las Vegas-based casino company in a $30.7 billion leveraged buyout eight years ago.

“I think Goldgar’s ruling -- in particular his focus on the failure of Apollo and TPG to contribute to the settlement -- means that the Caesars parties won’t be able to get their plan confirmed without Apollo and TPG kicking in,” said Julia Winters, a Bloomberg Intelligence analyst in New York and former bankruptcy litigator.

Lawsuits against the parent have been held up in New York for months. Cases in Chicago and Delaware, which aren’t as far advanced, target Apollo and TPG directly, along with their top executives, including TPG co-founder David Bonderman and Apollo co-founder Marc Rowan.

Representatives of Caesars, the operating unit, TPG and Bonderman declined to comment on the bankruptcy or the bondholder litigation. Rowan and an Apollo spokesman didn’t respond to phone messages and e-mails requesting comment.

‘Free Ride’

Goldgar accused Apollo, TPG and Caesars of using the bankruptcy to get a “free ride” past potential bondholder damages. As long as the lawsuits remained on hold, the firms enjoyed all the protections of bankruptcy, without any of the downsides. He concluded that forcing them to face the music was the best way to motivate them to strike a bargain with the dissident bondholders, who want more than what the operating unit is currently offering in its Chapter 11 plan.

“They have shown no keen sense of urgency to resolve the outstanding disputes that gave rise to the bankruptcy case,” the judge said on Aug. 26. The bankrupt unit has until Oct. 5 to persuade a higher court to overturn his decision. Failing that, it’s full steam ahead for the bondholders.

In their lawsuits, the bondholders say Caesars stripped the operating company of valuable assets that should have been preserved for them. They also say the parent company reneged on a promise to help pay the unit’s notes. Caesars, Apollo and TPG have all denied the allegations and say their actions were a legitimate attempt to restructure the unit. Caesars has also said the bond contract allowed the company to drop the payment guarantee.

Holdout Group

A committee that represents the bondholders, including affiliates of Appaloosa Management, pushed for permission to get the suits back on track, especially in New York, where Caesars has lost some early rulings.

The current bankruptcy plan contemplates forcing the bondholders to relinquish their claims and release the owners from liability. In exchange, Caesars would issue new stock to creditors and reorganize the operating unit into two new companies. One would run the casinos and pay rent to the other company, a real estate investment trust, which would own the land and buildings.

So far, Caesars has offered to contribute what it estimates is about $4 billion in cash, new debt and new shares to resolve the lawsuits and help the operating unit repay creditors owed $18 billion.

A committee representing second-lien bondholders owed $5.5 billion is the last major group still fighting for more. A majority of those bondholders have vowed to reject the current deal. According to Goldgar, Caesars needs to pony up about $1.2 billion more to end the standoff.

Apollo and TPG haven’t put in cash of their own to close the gap, saying the reorganization already dilutes their stake in Caesars, according to Brendan Hayes of Millstein & Co., an adviser to the bankrupt unit. Under the plan, the private equity firms’ ownership stake would be cut by about half.

The 2008 Caesars takeover could have been timed better. The financial crisis kept gamblers away, while new resorts crowded key markets such as New Jersey and Mississippi. Caesars, the largest owner of casinos in the U.S., closed properties in both states.  The company sought to restructure the balance sheet, refinancing loans and buying back bonds at a discount. In 2012, it sold about 2 million shares to the public at $9 each.

Caesars management, dominated by Apollo and TPG, also began shifting assets from the operating unit, the most heavily indebted subsidiary, to affiliated entities, according to a lawsuit filed last year on behalf of bondholders in Manhattan federal court. For example, Caesars Growth Partners, a newly created investment vehicle, bought five casinos from the unit, including Bally’s in Las Vegas and Harrah’s New Orleans.

CC Rating

Fitch Ratings gives the parent a CC rating, largely because of the risk the litigation will drag it into bankruptcy, according to Alex Bumazhny, a senior director of corporate ratings at Fitch.

Losing those suits could hurt Caesars just as investments it made to refurbish its properties, particularly in Las Vegas, are starting to pay off. Sales rose 2 percent to $2.4 billion in the second quarter, and adjusted earnings before interest, taxes, depreciation and amortization climbed 8 percent.

There’s not much left for Apollo, TPG and their partners to offer creditors. Their equity investments of $6.7 billion have withered. Their stakes in the parent company’s stock and Caesars Acquisition Co., a publicly traded affiliate, were worth about $1.68 billion, Hayes said in court.

The bondholders were “pretty aggressive,” said Fitch’s Bumazhny. “We didn’t think they were going to be this aggressive.”

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

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