Caesars bonds volatile as legal battles loom over restructuring plans

By Paul Deckelman

New York, Jan. 21 – There is a well-known quote, dating from the days of the old Roman Empire, that says, “render unto Caesar that which is Caesar’s.”

Fast-forward two millennia, and courts of law are carefully weighing and evaluating how much of the troubled gaming empire known as Caesars Entertainment Corp. to render unto the Las Vegas-based casino giant’s various classes of creditors – with at least three separate judges involved at this point.

The controversy surrounding the company’s efforts to allocate its properties before it finally took its principal operating unit, Caesars Entertainment Operating Corp., into Chapter 11 reorganization last Thursday and the response of some of its bondholders to those maneuvers has produced volatility in its various series of debt.

For instance, the 10% second-priority senior secured notes due 2018 originally issued in 2008 by Caesars’ corporate predecessor, Harrah’s Entertainment Inc., which were trading at around 55 bid a year ago, had dropped to 17 bid at the close of 2014 and continued to work their way down, hitting a nadir of 14 bid last Thursday, Jan. 15.

But following the news that same day that the company had filed a Chapter 11 petition for the operating unit, those bonds began moving up. By Friday, they had reached 17 bid, then 19 bid by Tuesday and 22 by Wednesday, with “an awful lot of them traded today,” a market source said, estimating that over $30 million had changed hands during the session.

The 21-22 context “gets them up a couple of points on that day,” he said, and then opined that “if Trace states that over $30 million traded, I would bet that a lot more really traded.”

Some of the other old Harrah second-lien notes got as good as 25 bid during the day. Meanwhile, bonds like the Caesars Operating Escrow LLC/Caesars Escrow Corp. 8½% senior secured first-lien notes due 2020 were trading at lofty levels around 78 bid on a round-lot basis, reflecting the sharply disparate recovery valuations that the market puts on the respective categories of notes.

Second-lien holders object

The company had worked for weeks to line up the first-lien noteholders behind its plan before a Jan. 15 filing deadline that was made necessary when, a month before that, it declined to make a $225 million scheduled interest payment on its 10% second-priority notes due 2015 and 2018.

However, while the terms of the agreement that it reached with those first-lien noteholders provided for them to recover at least 92 cents on the dollar during the restructuring, the second-lien holders were slated to get far less – published reports said they would stand to get no more than $549 million on their more than $5.2 billion claim against the company.

While the company was preparing for its filing with the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago, unhappy second-lien holders chose to make a preemptive strike, stealing a march on the company by filing their own, involuntary Chapter 11 petition three days earlier, on Monday, Jan. 12, with the federal bankruptcy court in Wilmington, Del.

In their filing, three creditors collectively holding about $41 million of the second-lien notes warned that under the terms of the company’s plan, they would be treated as if their stake were fully unsecured, rather than second-lien secured, providing them only with equity “that even the debtor values at a small fraction of the outstanding principal.”

The second-lien creditors also alleged a devious conspiracy on the part of management and its controlling shareholders – private equity giants Apollo Global Management and TPG Capital Management – which bought control of Caesars in a massive debt-fueled 2008 buyout; the creditors said that management, Apollo and TPG “have contemplated, and prepared for, a Chapter 11 bankruptcy filing for nearly a year, and perhaps even longer.”

The second-lien shareholders charged that “insiders have plundered the debtor, helping themselves to cash and other assets worth many billions of dollars, to the detriment of creditors” – an apparent reference to various transactions the company had engaged in during that time, transferring some valuable assets, such as its lucrative internet gaming franchise, which was transferred first to parent Caesars Entertainment from CEOC and then later to affiliated entity Caesars Growth Partners LLC, as well as some of its gaming resorts, that also eventually went to Caesars Growth Partners.

Meanwhile, other assets, such as CEOC’s interest in the Octavius Tower hotel in Las Vegas and Project Linq, an ambitious open-air mall development in Vegas anchored by the massive High Roller Ferris wheel – at 550 feet high, the world’s tallest – were transferred to Caesars Entertainment Resort Properties.

Caesars called the second-lien bondholders’ claims “meritless,” and went ahead with its own long-planned Chapter 11 filing, setting up a potential “battle of the dueling Chapter 11 filings.”

Judge Kevin Gross in Wilmington allowed routine first-day motions to be heard in Chicago granting the bankrupt operating company interim access to the cash collateral of its pre-bankruptcy secured creditors, with CEOC planning to use the cash collateral to fund continued operations while in bankruptcy.

However, Gross forestalled any further action from either side in the bankruptcy case – including the company’s formal opposition to the involuntary bankruptcy case – pending hearings that he will preside on Jan. 26 and Jan. 27 to determine which court would be the proper venue for the reorganization process going forward.

Much could be at stake with that decision, with the Chicago court thought in some quarters to be more inclined to shield the parent and other entities not currently in bankruptcy from the creditors.

Senior analyst Kim Noland of the Gimme Credit independent debt research service told Prospect News on Wednesday that should Gross decide the case should remain in Wilmington rather than be allowed to go to Chicago, hearing the involuntary case there “could benefit the second-lien notes, because Delaware law might make it easier to go after the transferees of the assets – for example, Caesars Resort Properties – and unwind, or at least provide, more compensation for junior creditors based on the illegality of some of those transactions.”

Another judge weighs in

On Monday, a new front in the legal war came to the fore, as U.S. District Judge Sheila Scheindlin in Manhattan refused Caesars’ request to toss out a separate lawsuit filed some months ago by less-senior creditors who attacked the aforementioned type of asset-shuffling away from CEOC, and who also contended that the company’s August move to cancel its previously extended guarantees of CEOC’s debt violated federal law.

Scheindlin agreed that cancelling the guarantees violated the Trust Indenture Act of 1939, calling it “an impermissible out-of-court restructuring.”

The noteholders invoked Section 316 B of the 1939 law, which they said barred Caesars from altering its obligation to pay off those guaranteed bonds at full principal and interest unless each of the affected bondholders were to consent to the modification of the terms.

In refusing to quash the bondholder suit, Scheindlin said that allowing the company to proceed would theoretically leave the bondholders with just “an empty right to assert a payment default from an insolvent issuer.”

Caesars said that “we respectfully disagree with the court’s ruling, which was based simply on the plaintiff’s allegations.” A company spokesman asserted that the ruling was “inconsistent” with the provision of the federal law, and added that given the relative sizes of the claims at issue – some $500 million , versus the more than $18 billion reorganization – and its “strong defenses, we do not expect the ruling to impact the planned reorganization.”

However, while some news reports in the financial press characterized the Scheindlin ruling as something that could merely complicate the bankruptcy procedure, others more bluntly warned that it could open the door to wider challenges; one major news service called it a “possible fatal blow” to the reorganization.

Anthony Canale, an analyst for Covenant Research LLC, a New York-based independent research service that specializes in analyzing the legal aspects of bond indentures and loan covenants, was not ready to go that far. But he did caution that “my initial take is that a broad application of Section 316B and the way that the judge describes it is problematic for a number of reasons, under the indenture.”

However, he also noted that in making her ruling, Scheindlin had cited an opinion by another federal judge last month in a case involving hedge fund Marblegate Asset Management LLC, which had sued Education Management Corp. over the latter’s debt-cutting efforts – a case that he said raised similar issues.

“So you definitely cannot dismiss the fact that two federal judges have weighed in with opinions that 316 B ought to be more broadly construed,” he concluded.

Another analyst said that “the second-lien and junior creditors just had an initial success in federal court in the litigation they filed, alleging fraudulent transfers and asset-stripping. If the bankruptcy case proceeds in Delaware, there is some likelihood that similar litigation by these junior creditors will throw a wrench into Caesars' restructuring agreement with its first-lien holders and delay what could have been essentially a ‘cram down’ of those junior interests.”

© 2015 Prospect News.
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