The latest twist in the tortuous road to bankruptcy reorganization for debt-laden Caesars Entertainment—allegations of fraud by creditors who want to reverse a complicated restructuring that has seen the casino giant move its better-performing gaming assets into a healthy subsidiary and ostensibly out of their reach.
The claim is included in a lawsuit filed in the US state of Delaware by a trustee of second-lien bondholders owed more than US$3.6 billion. It’s one of two suits challenging the asset transfers. Caesars has filed its own action in a New York court seeking validation of the transfers and a ruling that would prevent bondholders from filing notices of default.
The trustee’s suit accuses the Las Vegas-based operator, the largest in the US by number of casinos, of designing a restructuring plan that would create a “good Caesars” with lower debt and valuable assets and a “bad Caesars” that may be put into bankruptcy, possibly as early as next month, according to news reports.
The second case was filed by senior bondholders at the direction of US hedge fund giant Elliott Management Corp. The creditors in that case want a judge to appoint a receiver to run the company’s main operating unit, Caesars Entertainment Operating Co.
Both the junior and senior creditors have criticized the heads of buyout firms TPG Capital and Apollo Global Management as responsible for the transfers. TPG and Apollo took Caesars private in a 2008 leveraged buyout that loaded the company with $30 billion in debt. The company’s industry-leading obligations currently amount to around $23 billion.
Caesars denies any wrongdoing and claims the transfers were allowed under its debt contracts. The company, moreover, accuses creditors of maneuvering to improve their bargaining positions and says that credit default swaps held by some of them will pay “handsomely if their threats and baseless claims” force the operating company into default, the company said in a Delaware filing cited by Bloomberg News.
In its New York lawsuit, Caesars singled out Elliott for possessing swaps that created “a blatant conflict of interest” and incentivized the hedge fund to trigger a default so it could receive payouts.
Elliott owns at least 30% of a series of Caesars bonds—a “blocking position,” as it’s known— and has pushed the trustee of those notes to sue, according to Bloomberg sources. That suit seeks to put a receiver in control of CEOC.
Elliott bought credit-default swaps before entering negotiations with Caesars in September and has continued to purchase the derivatives, according to Bloomberg sources who asked not to be named because CDS trades are private.
Elliott denies the Caesars’ claim, calling it a “red herring,” and has filed a motion to dismiss the company’s suit.
“It defies logic to imply that EMC would intentionally seek to destroy the value of the debt holdings of funds it manages in order to collect on the CDS,” the fund said in a November filing.
Credit default swaps, famously criticized by Warren Buffett during the global financial crisis as “weapons of mass destruction,” are valued by bondholders as protection against losses or as a way to double down on a company’s creditworthiness. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, resulting in some instances in creditors profiting more from a swaps payout than an issuer actually meeting its obligations.
“In situations where credit-default swaps play a meaningful part of the case, you don’t realize the strange impact they have on the process,” said David Kurtz, global head of restructuring at Lazard, speaking at a recent debt conference in New York. “What you find is that you don’t really know the motivation of the holder of the debt.”
The derivatives also have come under fire as a factor in Europe’s sovereign debt, and in Argentina, Elliott, a leading holdout creditor from the nation’s debt crisis in 2001, pursued legal action against the government that in July helped trigger a second default in 13 years and US$1 billion of credit swaps. Argentine Economy Minister Axel Kicillof said he suspected Elliott held the derivatives, a market that he said clouded the motives of creditors. Elliott denied in US court last year that it owned the swaps.
