Caesars Entertainment: Playing the blame game

The Caesars’ bankruptcy proceedings have already dragged on for more than a year as burned creditors accused Apollo and TPG of managing the process to leave them out of pocket while limiting their own losses.

Many hoped the long-awaited examiner’s report would close the battle over the future of gaming chain, but it seems to have added more fuel to the fire.

The 1,787-page report by Richard Davis concluded that Caesars Entertainment Corp (CEC), the parent company of Caesars Entertainment Operating Company (CEOC), deliberately orchestrated transactions to drive the business towards bankruptcy to the detriment of the gaming chain and its creditors.

Davis said he investigated 15 transactions between CEOC, its parent and the buyout sponsors, Apollo Global Management and TPG. “The principal question being investigated was whether in structuring and implementing these transactions, assets were removed from the CEOC to the detriment of CEOC and its creditors,” the report said. “The simple answer to this question is ‘yes’…

“As a result, claims of varying strength arise out of these transactions for constructive fraudulent transfers, actual fraudulent transfers (based on intent to hinder or delay creditors) and breaches of fiduciary duty by CEOC directors and officers and CEC.”

The report added that damages resulting from these transactions could be worth between $3.6 billion and $5.1 billion.

Apollo and TPG disagree with the examiner’s findings and most of the investment firms and the lawyers representing them declined to comment for this story.

THE BACK STORY

Alternative investment heavyweights Apollo Global Management and TPG originally bought Caesars with $6 billion in cash and $22 billion in debt in 2008. Then came the global financial crisis and consumer spending plummeted.

Even as the US began to recover, it was clear that the business was not strong enough to support the firm’s massive debt pile, let alone the kind of growth that the private equity owners were seeking ahead of a spin-out or sale.

In October 2013 and May 2014, CEOC transferred ownership or stakes in some entities to other units in the business. In November 2014, Caesars revealed that it did not expect to have enough cash to continue paying back its roughly $23 billion debt pile.

Later that year, the company came to a restructuring agreement with some creditors to transfer much of its hotel property holdings into a new real estate investment trust, control of which would be handed over to lenders, while a separate unit would continue operating the casinos.

But some lenders were not convinced and accused Apollo and TPG of stripping assets from CEOC for their own benefit ahead of the inevitable debt restructuring. CEOC finally filed for Chapter 11 bankruptcy protection on 15 January last year and seven months later reached a restructuring plan with the support of 80 percent of its first lien lenders, who held about $12 billion in debt. The deal would allow Caesars to erase about $10 billion from its debt pile.

However, the second lien creditors, led by hedge fund Appaloosa Management, brought lawsuits against CEOC arguing that their debt was guaranteed by Caesars and the company drove the business towards bankruptcy deliberately.

Judges postponed ruling on the claims until Davis’s report was published. Now it has been release, the court cases are expected to resume. And while Davis’s findings were based on scores of interviews and a wide-ranging investigation, CEOC and its equity backers don’t appear to be giving up easily.

CEC and its private equity sponsors all issued statements disagreeing with the findings. They argued that their actions were in the best interest of the company and its creditors. They also reminded the public that the transactions in question were backed by independent valuation providers and legal counsel.

CEC issued a statement claiming: “We believe the evidence shows that each of the challenged transactions was undertaken to strengthen CEOC and provide it with the liquidity and resources required to sustain it and give it time to recover from unprecedented market challenges. These transactions provided immense and indisputable benefit to CEOC and its creditors, who received billions of dollars in principal and interest payments.”

Spokesmen for TPG and Apollo also said they disagreed with the examiners conclusions.
“The fundamental dispute relates to the valuation of the assets involved in the relevant transactions, as to which in all instances the Caesars board relied on independent valuation experts and outside legal counsel. In all regards TPG acted properly, in good faith and with the underlying belief that the relevant transactions preserved value for all Caesars stakeholders. TPG intends to vigorously defend against any claims that might be asserted,” said TPG.

Apollo stated: “We believe that Apollo Investment Management VI acted appropriately and in good faith to help Caesars Entertainment Operating Company strengthen its capital structure, achieve substantial deleveraging, extend its economic runway and create value for itself and its employees, creditors, vendors and other stakeholders.”

Apollo also said that independent oversight was involved in these transactions. “Each of the most significant asset sale transactions was overseen and approved by a special committee of independent directors of CEOC’s parent, CEC, and the special committee did not include any representative from Apollo or any other stockholder,” the firm said.

“Moreover, each of the significant asset sale transactions was overseen by a nationally recognised legal advisor to ensure a fair and reasonable process, and the valuation for each asset sale was independently found to be fair and reasonable by leading and highly regarded financial advisory firms.”

TAKEAWAYS

The investment firms in these cases have armies of lawyers representing them, so even though the examiner’s findings appear conclusive, the debate could drag on, with each party seeking to shift the blame.

One of the junior creditors’ many cases is expected to go to trial on 9 May. CEC has said it expects to prevail, but has also admitted that a loss could force it to declare bankruptcy as well. By July, CEOC could lose its exclusive right to propose a reorganisation plan.

CEOC has also asked for a mediator to help it negotiate with the squabbling groups of creditors.

Retired judge Joseph Farnan was appointed to the role in early March.
This year, most industry experts tell PDI they see an increase in defaults and restructurings coming down the line. Whatever the outcome, the Caesars case serves as a cautionary tale, reminding sponsors and creditors alike of just how painful and drawn-out restructuring can get.

TIMELINE

2008
Apollo and TPG buy Caesars for $6 billion in cash and $22 billion in debt.

February 2012
The firm’s private equity sponsors list less than 2 percent of the shares in CEC raising $16.3 million.

October 2013
Stakes in Planet Hollywood Resort Las Vegas, Octavius, Linq, The Horseshoe Baltimore are transferred from CEOC to other entities within the group.

May 2014
CEOC transfers three casinos, The Cromwell, The Quad and Bally’s Las Vegas to other units.

November 2014
Caesars says it doesn’t have enough money to continue paying back its $23 billion debt burden. The company starts a plan to split its hotel property holdings into a real estate investment trust that would be handed to the lenders and keep another unit that would operate the casinos.

December 2014
Junior lenders oppose the plan agreed with senior creditors. They accuse Apollo and TPG of stripping assets from CEOC ahead of the debt restructuring ultimately for their own benefit and to preserve some equity value by leaving them in control of CEC, the parent entity.

January 2015
CEOC files for Chapter 11 bankruptcy protection.

Summer 2015
Junior creditors, including Centerbridge Partners, Oaktree Capital Management and Appaloosa Management, argue in New York and Delaware courts that the company needs to determine if the operating unit’s debts are guaranteed by CEOC’s parent.

July 2015
US bankruptcy judge Benjamin Goldgar denied a request by CEC to stay four lawsuits by hedge fund creditors who are owed billions of dollars by CEOC. The creditor lawsuits sought up to $11 billion.

August 2015
Eighty percent of Caesars’ first lien lenders, holding about $12 billion in debt, agree to a debt restructuring which would help Caesars erase $10 billion in debt, leaving the company to negotiate with its second lien lenders.

September 2015
The restructuring plan fails to pass with Caesars’ second lien lenders. The CEOC needed 50 percent of its junior debt holders to approve the plan.

February 2016
CEOC seeks a court appointed mediator to help it negotiate with creditors and speed up the bankruptcy proceedings.

March 2016
Retired judge Joseph Farnan agrees to serve as the mediator in the Chapter 11 bankruptcy of CEOC. Court-ordered examiner Richard Davis publishes his report into the legality of the asset transfers. It says that assets were stripped from the company to the detriment of the CEOC and its creditors amounting to damages of $3.6 billion-$5.1 billion.