Bankruptcy Watchdog Looks to Thwart Caesars’ Reorganization Plan

Posted on: November 22, 2016, 07:00h. 

Last updated on: November 22, 2016, 06:03h.

Caesars bankruptcy US Trustee objection
The US Trustee’s concerns about Caesars’ bankruptcy reorganization plan could spell real trouble for the casino group and its private equity backers. (Image: Caesars Entertainment Corp)

Caesars’ nearly two-year battle to extricate itself from bankruptcy proceedings and reorganize the industry-high debt of its main operating unit, CEOC, could be in serious jeopardy, just as the end appeared to be in sight.

While CEOC’s various creditors have now all agreed to a reorganization plan, after 23 months of bitter legal squabbles, the US Trustee this week lodged an official objection to the plan.

US Trustee is the watchdog that oversees the administration of bankruptcy cases; its problem with this one is that it offers “blanket immunity” to Caesars’ private equity backers, Apollo and TPG.   

Apollo and TPG formed Caesars through the $30.1 billion leveraged takeover of Harrah’s Entertainment in 2008, just before the recession bit hard into the casino industry, leaving it with $18 billion in debt.

Serious Allegations

Caesars sought bankruptcy for CEOC in an attempt to reorganize that debt down to about $10 billion but its junior bondholders believed they were getting a bum deal. Many sued Caesars in an attempt to hold the casino giant to guarantees of CEOC’s debts.

They accused Caesars of stripping the unit of its most valuable assets for the benefit of Apollo and TPG, leaving it with nothing but distressed assets and unpayable debts.

A court-appointed examiner’s report, spearheaded by Watergate prosecutor Richard Davis, essentially agreed with this assertion. After pouring over 80 million pages of Caesars’ records, Davis’ team concluded that CEOC was indeed picked clean of its prize properties.

The report claimed that in 2012 Apollo and TPG began a strategy to weaken CEOC and strengthen their own hand in the preparation for potential bankruptcy proceedings, a claim that exposes the hedge funds to possible allegations of fraud.

But in the meantime, the warring parties have reached agreement after Caesars agreed to sweeten the pot for the junior creditors, by $5 billion.

Last month, the final hold out creditor came on board with the plan, which includes a condition that the company be released from allegations of asset stripping and resulting billions of dollars in legal claims.

US Trustee Files Objection

But not so fast, says the US Trustee. On Monday it filed an objection to the releases on the grounds that they offered exculpation of “a wide array of parties for acts far beyond the plan or the Chapter 11 cases,” according to Reuters.

The watchdog also said the legal releases were too broad for shielding against willful misconduct or actual fraud.

This could spell trouble for Apollo and TPG, and trouble, too, for the Caesars brand. Should the company ultimately be charged with the alleged asset-stripping it could be liable for billions in fines and damages, which would not only disrupt CEOC’s bankruptcy but pull the whole group down with it.

A trial to confirm the bankruptcy is due to take place in January.