Caesars unit second-lien noteholders file involuntary bankruptcy case

By Caroline Salls

Pittsburgh, Jan. 12 – Caesars Entertainment Corp. subsidiary Caesars Entertainment Operating Co., Inc. (CEOC) had an involuntary Chapter 11 bankruptcy case filed against it Monday in the U.S. Bankruptcy Court for the District of Delaware by three 10% second-lien noteholders.

The involuntary petition was filed by creditors Appaloosa Investment LP I, OCM Opportunities Fund VI, LP and Special Value Expansion Fund, LLC.

The petitioning creditors hold a total of $41.08 million of 10% notes claims against CEOC, with OCM holding an $18.24 million claim, Appaloosa a $13.11 million claim and Special Value a $9.73 million claim.

The noteholders said in documents filed with the court that they filed the involuntary Chapter 11 petition against CEOC because it “elected not to pay” roughly $225 million in interest to holders of its $4.5 billion principal amount of second-priority senior secured notes due 2018.

The petitioning creditors said the company elected not to make the Dec. 15 payment, even though it had about $1.5 billion in cash and cash equivalents. CEOC said it was taking advantage of a payment grace period.

“There is no grace period, however, applicable to payments on the second-lien notes, the existence of a default under the indentures, or the right of holders of the second-lien notes to enforce the debtor’s obligations to pay the past due interest payments,” the petitioning creditors said.

As previously reported, CEOC and some of its subsidiaries plan to make a voluntary Chapter 11 filing no later than Jan. 20 under an amended restructuring support and forbearance agreement with the parent company and CEOC’s first-lien noteholders.

Under the Chapter 11 plan that would be proposed under the first-lien noteholders’ agreement, the holders of the second-lien notes would never receive the interest payment due on Dec. 15, nor would they receive payment on account of most of the outstanding principal amount of second-lien notes, the court documents said.

Instead, the noteholders said the plan would treat them as fully unsecured and provide them with equity “that even the debtor values at a small fraction of the outstanding principal.”

The petitioning creditors said “it appears that the debtor and its controlling shareholders have contemplated, and prepared for, a Chapter 11 bankruptcy filing for nearly a year and perhaps even longer.”

“During that period, insiders have plundered the debtor, helping themselves to cash and other assets worth many billions of dollars, to the detriment of creditors,” the second-lien noteholders said.

Company responds

In a statement, CEOC called the claims of the junior creditors “meritless.”

“The involuntary petition is a transparent attempt to thwart a restructuring that has been agreed to by more than two-thirds of CEOC’s first-lien noteholders,” the company said. “The action is designed to injure CEOC while these junior creditors attempt to boost their standing.”

CEOC said it will formally respond to the involuntary petition shortly. In the meantime, all business operations will continue normally.

The company also said it plans to proceed toward the implementation of its previously announced restructuring agreement.

Examiner appointment request

The petitioning creditors asked the court to appoint an examiner to investigate and report on a series of pre-bankruptcy insider transactions under which the parent company allegedly “systematically stripped [CEOC] of many billions of dollars of assets and cash in the 15 months prior to bankruptcy.”

The second-lien noteholders said the transactions in question fall into three general categories, including transfers of valuable assets to insiders for inadequate or no consideration without the benefit of any marketing process, occurring when CEOC had no independent directors; direct payments of hundreds of millions of dollars to insiders; and other actions taken by CEOC for the benefit of insiders.

“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,” the examiner motion said.

The petitioning creditors are represented by Young, Conaway, Stargatt & Taylor, LLP.

Possible defaults

According to an 8-K filed with the Securities and Exchange Commission, an event of default occurs under CEOC’s senior secured credit facilities if an involuntary Chapter 11 petition is filed against the company and continues undismissed for 60 days or if an order approving the involuntary petition is entered.

In addition, an event of default occurs under CEOC’s first-priority senior secured notes, second-priority senior secured notes and senior unsecured notes if a court enters an order for relief against CEOC in an involuntary case and that order remains unstayed and in effect for 60 days.

Caesars is a Las Vegas-based casino-entertainment company. The involuntary Chapter 11 case number is 15-10047.

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