Caesars Moved Several Casinos from CEOC to Other Units Prior to CEOC’s Bankruptcy Filing
U.S. Bankruptcy Judge Kevin Gross ruled on Wednesday that the Caesars Entertainment Operating Co.’s Chapter 11 bankruptcy case will occur in Chicago, Illinois. Judge Gross, whose court is found in Wilmington, rejected a motion by creditors to have the multibillion dollar lawsuit play out in Delaware.
Creditors Versus CEOC
The suit was filed by junior bondholders the day after a wing of Caesars Entertainment, the operating unit known as CEOC, filed for bankruptcy in Chicago. The bondholders believe Caesars executives juggled assets last summer to keep them away from creditors, all in preparation for an inevitable bankrutpcy filing. Though 80% of first lienholders agreed to a bankruptcy plan that involved equity in a new wing of Caesars Entertainment, the remaining 20% wanted access to CEOC’s assets, as well as those moved out of CEOC in the summer of 2014.
The bondholders also wanted a venue change to the Delaware courts, which have a more refined and sophisticated set of bankruptcy laws. The decision of Kevin Gross to keep the suit in Illinois is thus seen as a victory for Caesars, given that is the jurisdiction Caesars believed it would receive the best hearing. Gross said in his ruling, “I have determined that the cases will proceed in the Northern District of Illinois.”
Restructuring Plan to Be Decided in Chicago
Now that the choice of venue is determined, the private equity firms which control Caesars Entertainment will see if the Chicago courts will allow their restructuring plan to go through. The plan by Apollo Global Management and TPG is to shed debt and salvage value by splitting CEOC into two units, with one representing operations and the other representing a real estate venture.
Apollo and TPG are known for their aggressive style in dealing with creditors when an investment goes wrong. That style appears to have convinced 80% of the bondholders to give the new bankruptcy plan a try.
Junior Bondholders Receive Less Equity
The junior bondholders, who own bonds with a relatively low priority ranking, includes major Wall Street firms like Oaktree Capital Management and Appaloosa Management. Because the two sides have competing restructuring plans, the rival filings has sparked interest in seeing two group of NYSE-savvy financial groups vie for control of assets. Lawyers for both sides sought a venue that would give each the best opportunity to win, so the first round goes to Apollo and TPG.
The judge in the case cited “the interest of justice” in maintaining the jurisdiction, saying he did not want to set the precedent of allowing creditors to derail bankruptcies by asking to change venues. The judge also moved the involuntary bankruptcy case filed by the creditors to be moved to Chicago.
Illinois Bankruptcy Laws
Illinois has a more narrow set of rules when it comes to bankruptcy law, an interpretation which might allow Caesars to move ahead with its reorgnization without creditors getting a hand on Caesars Entertainment’s core assets. Delaware courts have a more expansive interpretation of the bankruptcy code, so their courts tend to be friendlier to Wall Street investors when a bankruptcy has been filed.
The junior bondholders did not like the restructuring plan, because they would be paid far less than the first lienholders. The first lineholders are the only class of investors to be paid in full, so the other creditors feel as if they are being made to pay the costs of Caesars Entertainment’s bankruptcy plan.
Gross Lectures Caesars’ Lawyers
Just because he granted Caesars the venue it wanted, Judge Gross was not sympathetic to the parent company’s method of doing business. Gross gave a stern lecture to CEOC’s lawyers and executives, saying the creditors’ allegations were “serious” and suggesting that Caesars’ owners “engaged in a series of self-dealing transactions“.
The judge in Wednesday’s hearing also said that Caesars’ “suspect dealings” would be investigated in full by the Chicago court, telling them that those dealing will be “under a magnifying glass“. Such words should give some comfort to the junior bondholders in the case, but Judge Gross won’t be sitting in a Chicago courtroom to make those decisions, so the accuracy of his predictions are yet to be known.
This is but the first of many key decisions in the coming bankruptcy case. A financial analyst for Forbes suggested recently the case could take years of litigation–and might not end well for the creditors.
