Junior creditors of Caesars Entertainment Corp. (CZR) moved to force the main operating unit of into bankruptcy in an attempt to block a plan to protect senior lenders at their expense, after contentious wrangling over the casino company’s future.
The involuntary Chapter 11 filing today by Appaloosa Investment LP and other junior lenders in Delaware pre-empts Caesars’ own effort to put the unit under bankruptcy court protection and threatens to scuttle a deal between the company and senior creditors. Appaloosa asked the court to appoint an examiner to investigate claims that insiders “plundered” the unit, paying themselves hundreds of millions of dollars while moving assets out of the junior creditors’ reach.
“These insider transactions stripped the debtor of most of its valuable income-generating assets and hundreds of millions of dollars of cash, leaving the debtor burdened with massive debt that cannot be repaid,” Appaloosa and the other junior creditors said in court papers today.
The filing by Appaloosa and other holders of second-priority senior secured notes in the unit follows months of negotiation and litigation between Las Vegas-bases Caesars and its creditors.
Caesars, bought by Apollo Global Management LLC (APO) and TPG Capital in 2008, has been working on a plan that would put its biggest unit into Chapter 11 bankruptcy protection voluntarily as soon as this week and turn it into a real estate investment trust.
Company Plan
That plan requires Caesars Entertainment Operating Co., the most indebted subsidiary, with $18.4 billion of borrowings, to exit bankruptcy court as a reorganized set of companies by February 2016, according to a regulatory filing last month.
Caesars said last week that it expected to have support for a restructuring deal from investors holding two-thirds of its senior bonds. That threshold would make it eligible to seek court approval of a reorganization plan. Even with such support, however, other creditors still have the right to challenge any reorganization.
‘Transparent Attempt’
“The claims are a transparent attempt to thwart a restructuring that has been agreed to by more than two-thirds of CEOC’s first-lien noteholders,” Caesars said in a statement in response to Appaloosa’s court filings. “The action is designed to injure CEOC while these junior creditors attempt to boost their standing.”
The company said the involuntary bankruptcy petition would not affect Caesars’ operations.
Under Chapter 11 of the U.S. Bankruptcy Code, creditors can force a company into bankruptcy by claiming it’s generally not paying its debts. The company can either dispute the claims and seek to have the involuntary petition thrown out, or move to convert the case into a voluntary bankruptcy and reassert its control over the reorganization.
A company initially retains control of its operations in the days following an involuntary bankruptcy while creditors and company officials fight in court over what should happen next.
Last year, creditors sued Caesars, with some accusing it of shifting the most valuable assets out of the operating company to other units.
In 2011 the operating unit moved its online gambling business, worth about $780 million, to another Caesars’ entity. Last year, the operating company transferred ownership of two Las Vegas properties, a hotel and a dining, shopping and entertainment corridor. Creditors said the unit didn’t get enough in return for the assets.
‘Good Caesars’
The goal was to create a “good Caesars” with lower debt and profitable assets and a “bad Caesars” with higher debt and less valuable assets, according to one lawsuit, filed by a trustee for second-lien creditors. Should “bad Caesars” fail, “good Caesars” would be protected, the creditors said.
In December, the company skipped a $225 million interest payment on the second-lien notes, days before announcing its restructuring plan. Appaloosa and other holders of those notes moved to put the brakes on that plan with today’s filing.
Under the company’s proposed Chapter 11 plan, second-lien noteholders would never receive the interest payment, Appaloosa said in the filing.
“Instead, the plan would treat holders of second lien notes as fully unsecured, and provide them with equity that even the debtor values at a small fraction of the outstanding principal,” according to the filing.
The creditors asked the court to appoint an examiner “to investigate and report on a series of pre-petition insider transactions by which the parent of Caesars Operating Co. Inc. systematically stripped the debtor of many billions of dollars of assets and cash in the 15 months prior to bankruptcy.”
The case is In re Caesars Entertainment Operating Co., 15-10047, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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