Could Caesars Entertainment Be Forced Into Liquidation?

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Monday, February 15th, 2016 | Written by Charles Washington

Caesars Entertainment Operating Co (CEOC) has been put on notice that continuing with their current course of reaction during bankruptcy proceedings could have consequences, namely the liquidation of their assets. As a part of the background investigation for their bankruptcy filing, an investigator concluded that elements of the company’s plan smacked of fraud, putting the company at risk for penalties during the litigation.

Suspicious Shifting of Assets

Caesars has been trying hard to keep the investigator’s report out of the proceedings. Judge Benjamin Goldgar expressed frustration over their actions and cautioned that if the company continued to try and suppress the report, he would respond by beginning liquidation. The company has been fighting to keep 7 million pages of evidence out of the court’s eye, saying that they are privileged information.

The plan that Caesars has suggested is currently being keenly scrutinized, and focuses on reorganizing Caesars Entertainment Operations Company, which is responsible for $18 billion worth of the $23 billion in debt that Caesars Entertainment currently owes. In what appears to be an attempt to move around key assets to protect them from bankruptcy, Caesar’s has shifted many properties out of the control of Caesars Entertainment Operations Company back in the summer of 2014. Then, the company declared bankruptcy at the end of 2014.

The Bankruptcy Plan

The plan that Caesars Entertainment developed would split Caesars Entertainment Operations Company into two separate divisions, each of which would assume half of the $18 billion in debt. Primary leinholders would get stock in a brand new real estate division that is likely to reward high dividends, and the remaining 20 percent would keep control of their ownership in Caesars Entertainment Operations Company and would be unlikely to ever see any of their debt repaid.

In response to what they believe to be an unfair practice, the secondary leinholders filed a lawsuit against Caesar Entertainment. A New York City bank has also taken legal action against Caesars, and Judge Goldgar has ruled that both lawsuits can proceed.

The Investigator’s Report

The court-appointed Investigator, Richard Davis, concluded that there were two ways in which parts of Caesars reorganization plan amounted to fraud. First, he cited the fact that Caesars moved the company’s assets to protect them. Secondly, he found that Caesars intentionally took on debt planning to walk away from it as a part of bankruptcy.

Davis’ report is damning and could end up meaning that Caesars assets may be sold despite the steps taken to protect them. Legal action may also be taken against individual members of the board of directors. There is a further possibility that the states could investigate the actions of Caesars, which could end up meaning the loss of a gambling license in Nevada or New Jersey. In addition, the bad publicity caused by all of this could potentially anger stockholders and cause stock prices to fall, and so even if the board of directors escapes legal proceedings, they could end up out of a job.

CEOC to Request Mediator

In the meantime, CEOC will appear in a Chicago bankruptcy court on February 17th to request it be granted a mediator to help secure a restructuring deal with its creditors. CEOC originally filed its motion at the start of this month, with the company hoping that its request would serve to “incentivize the parties to reach a global compromise based on the current ongoing negotiations before a formal mediation session even occurs.”

Up until recently, CEOC had secured backing for its framework agreement from its senior lenders and bondholders, while the company’s junior creditors had refused to lend their support to the proposal. In the latest development, however, the very same group of senior creditors have now backtracked and are warning that they might reject the restructuring plan in favor of one of their own. The decision is partly influenced by a significant reduction in the value of the equity securities initially proposed in the interim period, and as first-lien noteholders noted in their filing:

“If sufficient progress toward a consensual plan is not made.. it may very well be that a plan proposed by the first lien bank and noteholders becomes the most efficient means to allow ( CEOC) to emerge in a timely manner from bankruptcy.”