Caesars Must Face Judgment in Bondholder Suits, Court Rules

  • Bankruptcy ruling affects $11.4 billion of potential losses
  • Lawsuits are biggest obstacle to resolving company’s fate

Caesars Entertainment Corp. must face bondholder lawsuits that could force it into bankruptcy alongside its main operating unit, a judge ruled, which sent the shares tumbling in late trading.

The ruling by U.S. Bankruptcy Judge A. Benjamin Goldgar in Chicago means Caesars could lose court cases by mid-September in New York and Delaware worth $11.4 billion. Judges in those states have scheduled court hearings to decide whether to rule immediately against the company, dismiss key parts of the suits, or send the cases to trial. The shares, which fell 3 cents during regular hours to $7.53, dropped 13 percent to $6.55 at 4:51 p.m. in New York.

The lawsuits are the biggest obstacle left to getting Caesars’s operating unit, Caesars Entertainment Operating Co., out of bankruptcy. Bondholders want to use the suits, which a court examiner found have a good chance of succeeding, to boost their recoveries above the 34 percent offered by the unit.

Caesars bankruptcy lawyers vowed to appeal and asked the judge to halt the suits while a U.S. District Court judge reviews Goldgar’s decision. Goldgar denied the request, which means CEOC must now seek an emergency order from a higher court overturning Goldgar’s ruling. Goldgar, who said that will be difficult, concluded that halting the lawsuits with an injunction wouldn’t help Caesars settle with bondholders.

“Most of the deal-making happened when there was no injunction in place” protecting CEC, Goldgar said in court.

Court Arguments

CEOC spent three days in court trying to persuade Goldgar to halt the lawsuits until next year, when the company will try to win approval of a bankruptcy-exit plan that would force a settlement on the second-lien bondholders backing the suits. The company was opposed by a committee that represents bondholders, including affiliates of Appaloosa Management, which hold more than half the $5.5 billion in notes that CEOC says it cannot fully repay.

“Both Caesars Entertainment and CEOC are disappointed by the bankruptcy court’s refusal to continue to stay the guarantee litigation,” Caesars said in an e-mailed statement.

Buyout Fallout

In the New York and Delaware lawsuits, bondholders claim that CEC, at the direction of its controlling owners, Apollo Global Management LLC and TPG Capital LP, abandoned a pledge to repay CEOC’s debts and divided the business into a profitable “good Caesars” with few debts and a “bad Caesars” that could be put into bankruptcy. Caesars, Apollo and TPG have all denied the allegations and vowed to prove their actions were a legitimate attempt to restructure CEOC.

The bondholder claims grew out of CEC’s struggle to restructure in the years following a $30 billion leveraged buyout in 2008. The company dropped a guarantee to help repay the second-lien notes, claiming the bond contract allowed the change. That action, and other restructuring moves have been attacked by the second-lien bondholders.

A bankruptcy court examiner backed the bondholder allegations, finding that there was a good chance that lawsuits against CEC and some of its executives could succeed in raising as much as $5.1 billion for creditors.

Owner Contributions

Central to the dispute over the reorganization plan is whether Apollo and TPG, through their indirect ownership of the Caesars parent, are contributing enough to settle the bondholder claims.

In June, Goldgar had halted the lawsuits in New York and Delaware to give CEOC time to negotiate a deal with the bondholders and others. That ban is set to expire on Aug. 29 and a New York judge is scheduled to hold a hearing the next day. CEC had lost preliminary rulings in New York, boosting expectations that the judge may rule in favor of the bondholder trustee behind some of the lawsuits. A Delaware judge had set a hearing for mid-September.

During three days of testimony, financial advisers from CEOC and the bondholder committee disagreed about whether forcing CEC to face the lawsuits would make it easier or harder to settle the disputes.

CEOC and CEC want to resolve those claims as part of a reorganization plan that’s scheduled to go before Goldgar in a January trial. CEOC will try to persuade Goldgar to approve its bankruptcy plan and a settlement package from CEC that it claims is worth $4 billion. In return for Apollo and TPG agreeing to see their ownership stakes shrink to about 30 percent from about 60 percent, the private equity funds, their executives and CEC would be freed from the lawsuits.

Pressure Point

Bondholders say the pressure of a potential loss in New York or Delaware will force Apollo and TPG to contribute more. Caesars claims that facing the lawsuits threatens its plan to give CEOC the $4 billion to help it reorganize and exit bankruptcy.

“Caesars Entertainment agreed to make a substantial contribution to CEOC to fund distributions to creditors under CEOC’s reorganization plan, including the junior creditors in this guarantee litigation,” the company said in its statement. Today’s ruling “puts that contribution and the timeliness for resolution at serious risk,” it said.

More Needed

Brendan Hayes, with Millstein & Co., testifying for CEOC, said in court that the company needs more than $900 million more to help reach a deal with a minority of the second-line bondholders and about $250 million more to convince the rest of the bondholders to settle. David Hilty of Houlihan Lokey, financial adviser to the committee, declined to say whether those amounts would satisfy a majority of the bondholders.

Hilty and Hayes have both been involved in confidential negotiating sessions being overseen by a retired federal judge. Details of those sessions became a focus of the hearing as both sides debated whether there was enough progress to justify an extension of the lawsuit ban.

Apollo and TPG have so far refused to give anything else to close the gap between the two sides. Under CEOC’s bankruptcy-exit proposal, CEC would issue new shares to help pay creditors, including bondholders. Apollo and TPG argue that their stake will be diluted by the new shares so they don’t have to give anything else, Hayes said.

The private equity firms, some of their executives and CEC face claims that a bankruptcy court examiner found could be worth as much as $5.1 billion. Insurance could cover about $300 million, Hayes said. CEC has offered stock, cash and new debt it says is worth $4 billion to settle the lawsuits and reorganize CEOC.

Hayes said CEC and a committee of second-lien bondholders may need about 30 days to settle their differences, but didn’t say exactly how much the committee is demanding.

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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