Caesars Creditors Seek Sway Over $20 Billion Reorganization

Creditors of Caesars Entertainment Operating Co. gathered in Chicago to jockey for spots on a court-sponsored panel that will determine whether the bankrupt casino company must contend with a loyal opposition, or its most intractable foes, as it tries to cut billions of dollars in debt.

In cases of this size, the U.S. Justice Department’s bankruptcy watchdog appoints an official committee to look out for the interests of unsecured creditors, including suppliers, pensioners and low-ranking bondholders. That process began Wednesday.

The Bankruptcy Code requires Las Vegas-based Caesars to pay the panel’s legal bills and other expenses. The company has no say in whether the committee is dominated by hedge funds out to foil its plans, or by friendly vendors just hoping to keep doing business with a big customer.

“The worst-case scenario for the company is a scorched-earth strategy taken by the committee -- of opposing everything that Caesars is trying to do, ousting management and imposing a trustee and litigating on several fronts,” said Bruce Grohsgal, a visiting professor of bankruptcy law at Widener University School of Law in Wilmington, Delaware.

Caesars’ main operating unit filed for bankruptcy Jan. 15, weighed down by debt taken on when Apollo Global Management and TPG Capital took the company private in 2008 for $30.7 billion.

Agreement Reached

The operating company and its non-bankrupt parent spent months before the filing hammering out a restructuring agreement with senior noteholders, while lower-ranking creditors assailed the casino operator for moving valuable assets out of the unit.

It’s unlikely the committee will start out friendly, said Grohsgal, who retired last year from Pachulski Stang Ziehl & Jones, where he represented creditors, official committees and bankrupt companies.

About 150 lawyers, financial advisers and creditors packed the largest courtroom in the Chicago federal courthouse Wednesday. When the meeting began, Denise Delaurent, an attorney with the U.S. Trustee, announced that her office wouldn’t be naming members of the committee today. She then asked everyone who wasn’t a creditor of Caesars, or a lawyer representing a creditor, to leave.

About half of the people left the Chicago courtroom, including some of the most prominent bankruptcy attorneys in the U.S. Some watched briefly through the window of the courtroom door as Delaurent talked to various creditors and attorneys.

Typically the U.S. Trustee questions creditors, or creditor lawyers, about their desire to be on the committee in private, said Martin J. Bienenstock, head of the restructuring and bankruptcy practice at Proskauer Rose LLP.

In this case, creditors were talking to Delaurent in front of other creditors.

Questioning creditors in front other creditors would be unusual in New York or Wilmington, Delaware, where many of the biggest bankruptcies are filed, Bienenstock said. That’s because it would allow creditors who may have competing claims to hear each other’s answers to the trustee’s questions.

At least two groups of bondholders eligible for the committee have already signaled their strong opposition to Caesars’ $20 billion restructuring proposal.

They tried to force the company into bankruptcy in Wilmington on Jan. 12. After Caesars filed in Chicago three days later, the Delaware case was sent there, where judges may be more sympathetic to some arguments the company plans to make.

Two Goals

The Justice Department’s Office of the U.S. Trustee typically appoints a committee of three to seven members, using questionnaires filed by creditors seeking a seat. In the past, members have been picked with one of two broad goals in mind, Grohsgal said: to maximize economic diversity or to recognize the size and types of unsecured debt.

A committee based on debt size may wind up dominated by Caesars’ fiercest opponents. The company owes unsecured noteholders about $1 billion and second-lien noteholders about $5 billion. Neither group stands to recover much in the plan being proposed by the casino company.

Unsecured 5.75 percent bonds maturing in 2017 fell 4 percent this morning, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Typically, second-lien debt wouldn’t be eligible, since it’s backed by collateral. But because their collateral is worth so little and Caesars is offering them such a small recovery, the second-lien noteholders may qualify based on so-called deficiency claims. Those are the debts left unpaid after collateral has been exhausted to pay creditors.

Possible Exception

“The norm is that partially secured creditors are not put on statutory creditors’ committees, but there are exceptions and this may be one,” said Bienenstock. “The statute only requires that the creditors hold unsecured claims, which the second lienholders do.”

There’s no shortage of investors opposed to Caesars’ plans. Funds affiliated with Appaloosa Management, Oaktree Capital and Tennenbaum Capital filed the involuntary bankruptcy case, and the trustee for all second-lien noteholders sued the company in August.

MeehanCombs Global Credit Opportunities Master Fund LP sued Caesars and its parent in New York last year. A judge in January allowed the case to go forward against the non-bankrupt parent, saying the company wrongly stripped some debtholders of repayment guarantees.

That lawsuit is similar to a case in Delaware, where the second-lien noteholder trustee accused Caesars and its parent of illegally shuffling assets and refinancing debt to protect Apollo and TPG.

Caesars has accused the lower-ranking creditors of trying to disrupt the pre-bankruptcy deal it made with senior bondholders.

Should the U.S. Trustee decline to create a committee that favors the bondholders, they can still fight the company in court. But they’ll have to pay their own legal bills.

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

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