Oaktree Cautions Congress Against Back-Room Deal on Caesars Debt

  • Gaming firm said to seek bond-battle relief in unrelated bill
  • Entire $225 billion distressed-debt market could be affected

As Congress heads toward its summer recess, Oaktree Capital Group LLC is urging lawmakers not to cut any back-room Washington deals that help its opponents in a fight over Caesars Entertainment Corp. with billions of dollars at stake.

Oaktree is expressing concern that Apollo Global Management LLC and TPG Capital Management -- the private equity firms that own Caesars -- will persuade lawmakers to slip a provision related to the Las Vegas-based casino operator into a broader bill, according to documents obtained by Bloomberg. Potential outlets could include Congress’s response to the Puerto Rico debt crisis or legislation to keep the Federal Aviation Administration in business ahead of a July deadline.

“We understand that Caesars and its sponsors are now again asking Congress to approve the” provision, Oaktree Vice Chairman John Frank wrote in a May 18 letter to House Speaker Paul Ryan and Minority Leader Nancy Pelosi. Since no stand-alone legislation has been proposed, “we are left to assume its supporters hope, once again, to add the rider to a ‘must-pass’ bill,” he wrote.

The dispute is centered on the Trust Indenture Act, a Depression-era law meant to protect the rights of bond investors. Caesars and its owners want new legislation to counter a court ruling they say distorts the act’s original intent and gives holdout bondholders too much power in restructuring talks. They’re hoping the revisions can be applied retroactively, which would help them beat back suits alleging they violated the law in a deal they cut before Caesar’s 2015 bankruptcy.

Caesars and its allies are telling lawmakers that Oaktree is being hypocritical, saying one thing to Congress and the opposite in court filings, according to people familiar with the matter who were not authorized to speak publicly. At stake is not just the reorganization of Caesars’ bankrupt operating unit but how bonds in the $225 billion distressed-debt market are restructured.

Protecting Bondholders

The fight began in federal court in Manhattan, when a judge ruled that the TIA protects bondholders who challenge out-of-court restructurings in certain circumstances. Critics including the U.S. Chamber of Commerce urged an appeals court to overturn that ruling, claiming it would give creditors too much power in debt-cutting talks and force more firms into bankruptcy.

Caesars and its supporters say they are simply trying to restore the original intent of a law that’s been misinterpreted. Oaktree and other opponents say lawmakers shouldn’t consider any changes outside of their regular process and public debate.

Oaktree may have good reason to be concerned. Caesars and its allies have considered ways to add their provision that include attaching it to the Puerto Rico bill that is moving through the House, according to people familiar with the matter. While they’ve decided the House bill isn’t the right vehicle, it’s possible they could consider using a Senate version, some of the people said.

A similar push failed at the end of 2015, even though Senate Minority Leader Harry Reid was among the lawmakers enlisted by Caesars. After that setback, the company and its owners has built a bigger coalition of supporters that includes distressed oil and gas companies as well as the Chamber, people familiar with the matter have said.

In a statement, Oaktree denied that its position in court papers differs from what it is telling lawmakers. A spokesman for Apollo didn’t immediately return a request for comment. Spokesmen for TPG and Caesars declined to comment.

Secondary Strategy

The Washington lobbying is a secondary strategy for Apollo and TPG, which are primarily fighting Caesars’ bondholders in bankruptcy court. Hedge funds and asset managers have sued the company over how its debt was restructured before its operating unit went bankrupt. The lawsuits could force Caesars to put its parent company through bankruptcy, wiping out some of Apollo and TPG’s investments. If Congress acts, Caesars might be able to limit legal setbacks.

And while Oaktree is fighting Caesars on Capitol Hill, the distressed debt investor had previously joined other investors in complaining about the new interpretation of the Trust Indenture Act. Oaktree, Centerbridge Partners LP and other lenders in September urged a federal appeals court to overturn the lower court ruling. In court papers, they said the decision “turns settled expectations of creditors’ rights on their head: It elevates junior unsecured creditors to a more advantageous position.”

Those claims, made in filings related to a much smaller, $14 million dispute between lower-ranking bondholders and Education Management LLC, reflect the juxtaposition that Caesars and its allies are pointing out to lawmakers on Capitol Hill, people familiar with the matter said.

In its statement, Oaktree said that it had stopped participating in that case just before the court papers were drafted and that it wasn’t involved putting together the brief. A week after it was filed, Oaktree quit the lender group that was fighting to overturn the ruling.

At the heart of Caesars’ dispute with Oaktree and other dissident bondholders is whether Caesars should have had to get unanimous approval before abandoning a promise to repay debt owed by its main operating unit. That unit later filed for bankruptcy, leaving investors with no guarantee that they’d receive payment for billions in debt.

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