Caesars Files To Reorganize Biggest Unit In Bankruptcy Duel

Jan 15 2015 | 6:40am ET

By Steven Church (Bloomberg) -- Caesars Entertainment Corp., the U.S. casino company, put its main operating unit into bankruptcy in Chicago today, setting up a showdown with dissident creditors who filed a competing case in Delaware.

The second Chapter 11 filing for the unit this week follows months of negotiation and litigation over how best to reduce the billions of dollars of debt assumed in a 2008 buyout that was arranged by Leon Black’s Apollo Global Management and David Bonderman’s TPG Capital Management.

That transaction occurred before the financial crisis and a glut of competition hobbled the U.S. gambling industry. Caesars has lost money every year since 2009 and has tried to remain solvent by refinancing debt and shuffling assets among its units.

Lower-ranking creditors of the Las Vegas-based company say the restructuring accord Caesars worked out with a select noteholder group unfairly protects the company’s interests at their expense. Their Jan. 12 bankruptcy petition seeks to keep the casino operator from closing that deal.

Caesars’ reorganization strategy protects Apollo and TPG by keeping the parent, Caesars Entertainment Corp., out of bankruptcy and instead puts in the operating unit and its affiliates.

Assets, Liabilities

The operating unit, which filed with more than 100 affiliates, listed about $12.4 billion in assets and $19.9 billion in liabilities in Chapter 11 documents today in Chicago.

The company asked for an “immediate” hearing on routine initial bankruptcy motions. It’s seeking permission to pay its employees and most important suppliers, and to use cash held as collateral for lenders.

Last year, a trustee for holders of so-called second-lien notes sued the company and top management last year, accusing them of plundering the operating unit of its most valuable properties. The dissident creditors accused Apollo and TPG of trying to create a “good Caesars” to hold the valuable properties and a “bad Caesars” to owe most of the debt.

The conflict came to a head earlier this week, when some of those creditors asked the Wilmington, Delaware, bankruptcy court to put the unit into Chapter 11 and hire an examiner to review the asset moves.

Typically, when two bankruptcies for the same company are sought in different jurisdictions, the judge in the case that was filed first determines where they will be heard. Creditors in the involuntary bankruptcy had asked the judge in Delaware to bar any action in a rival case.

‘Wreak Havoc’

Caesars said in a court filing in Delaware yesterday that the creditors are trying “to wreak havoc on the orderly process the debtors, their professionals, and the many consenting stakeholders have been preparing for months.”

U.S. Bankruptcy Judge Kevin Gross in Wilmington has said he would consider a request to prevent any court action in a second case after it’s filed. The creditors today asked Gross to halt the proceedings in Chicago.

Last month, Caesars skipped a $225 million interest payment due to lower-ranking creditors, who hold about $4.5 billion in second-lien notes. The Jan. 12 involuntary bankruptcy petition in Delaware was filed by Appaloosa Investment and funds affiliated with Oaktree Capital and Tennenbaum Capital, which listed about $41 million of the notes.

Debt Plan

More senior creditors spent months negotiating with Caesars on a plan to put the operating company into bankruptcy, cut its debt by about $9.8 billion and split it into two units. Under the proposal, Caesars Entertainment Operating Co. would become a real estate trust with two divisions, one to hold property and one to manage casinos. The new company would have about $8.6 billion in debt.

The Caesars’ parent, in turn, would give senior creditors a stake in the new companies, according to negotiation details released in December. A judge would have to approve the arrangement.

The proposal has received support from more than 80 percent of so-called first-lien noteholders, Caesars said in a statement today. The plan would cut the annual interest expense about 75 percent, to approximately $450 million from about $1.7 billion.

Randall S. Eisenberg of AlixPartners was named chief restructuring officer of the operating unit, according to the statement.

‘Without Interruption’

“The properties across the entire Caesars Entertainment network are open and will operate without interruption,” Gary Loveman, chairman and chief executive officer of Caesars, said in the statement.

While the company has been gathering support among senior bondholders, some senior lenders, along with the lower-ranking creditors, have declared their opposition to the proposed deal.

When Apollo and TPG took Caesars private, they and other investors contributed $6.1 billion in cash to help fund the $30 billion leveraged buyout. Under the proposed reorganization plan, much of that investment would be protected, while lower- ranking creditors wouldn’t be fully repaid the billions of dollars they are owed.

Caesars began moving assets from the operating company to other units in August 2010 with the transfer of trademarks worth $45.3 million, according to the creditor lawsuit.

Online Business

In 2011, the operating unit gave its online gambling business, worth about $780 million, to another Caesars’ unit. Last year the operating company transferred ownership of two Las Vegas properties.

Creditors said the operating unit didn’t get enough in return for the assets.

The unit and its affiliates employ about 32,000 people in the U.S., according to court filings. It runs seven regional casinos in the Midwest and six in the Southeast, along with four in Nevada, including Caesars Palace at the heart of the Las Vegas Strip. Other resorts are located in Arizona, California, Maryland, Pennsylvania and Atlantic City, New Jersey.

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