Caesars Entertainment’s (CZR) plans to put its main operating arm, Caesars Entertainment Operating Company (CEOC), into Chapter 11 bankruptcy hit a major setback this week when a
New York judge ruled that its reorganization efforts have violated federal law.
Caesars has been involved in months of negotiation and litigation with its bondholders as it attempts to restructure some $18 billion of its debt.
But the group’s lower level creditors argue that its restructuring plan, worked out with its major creditors, unjustly protects the company’s interests at the expense of their own.
When Caesars filed for voluntary bankruptcy court in Chicago last week, these creditors had already filed a suit of their own against Caesars, for involuntary bankruptcy, three days earlier in a court in Delaware.
The hearing this week in Manhattan was an attempt by Caesars to have the Delaware filing dismissed, a move that ultimately caused the company more harm than good.
Render Unto Caesars…
US District Judge Shira Scheindlin was critical of CZR, ruling that creditors’ accusations about the transfer of valuable properties away from CEOC over the summer, as well as the CZR’s removal of guarantees for creditors, were a violation of the federal Trust Indenture Act of 1939.
It was exactly this kind of “impermissible out-of-court restructuring” that the Act was designed to prevent, she said.
Caesars’s astronomical, industry-high debt stems from 2008 when it was bought out by Apollo Global Management and TPG Capital in a $30.1 billion takeover.
This was just as the recession began to ravage the casino industry in America, and Caesars, then with 50 casinos across the US, bore the brunt of that recession.
Caesars has lost money every year since 2009, and recently posted Q3 losses of $908.1 million.
It has consistently struggled to pay the interest on its debt, last month defaulting on a $225 million repayment.
According to Judge Scheindlin, the dissident bondholders’ complaint alleges that Caesars’ “ultimate plan” is to put CEOC “into bankruptcy while protecting Apollo Management LP and TPG Inc. from CEOC’s creditors.”
The group of creditors has also accused the company of attempting to create a “good Caesars” and a “bad Caesars,” one to own the valuable and iconic properties and one to hold the debt.
Caesars has countered that the group is trying “to wreak havoc on the orderly process the debtors, their professionals, and the many consenting stakeholders have been preparing for months.”
“We believe this restructuring is in the best interests of all of CEOC’s stakeholders and will result in a sustainable capital structure for CEOC and value creation for all stakeholders,” said Gary Loveman, CEO of Caesars Entertainment and chairman of CEOC, recently. “The restructuring of CEOC is the culmination of a years-long effort to improve the health of CEOC’s balance sheet, which has included substantial investment in new and upgraded assets, especially in Las Vegas.”
Meanwhile, the two bankruptcy cases are effectively frozen until the judge in Delaware decides which court will preside over the bankruptcy proceedings.
In a statement, Caesars spokesman Stephen Cohen said the company was unfazed by the court ruling this week. “Given the size of the claims at issue and our strong defenses, we do not expect the ruling to impact the planned reorganization,” he said.