Caesars faces further bankruptcy proceedings after Harry Reid´s proposed amendment to the Trust Indenture Act of 1939 was rejected by the Senate.
In January this year, the largest of Caesars Entertainment Group´s subsidiaries – Caesars Entertainment Operating Co. – started Chapter 11 bankruptcy proceedings in order to restructure the company as a real estate investment trust and reduce its crippling debts.
The subsidiary owes more than $18 billion to bondholders and, under the proposed restructuring, more than $10 billion would be wiped from its debts. Understandably, secondary bondholders – those who stand to lose the most – are outraged, and issued lawsuits both before and after the Chapter 11 filing to protect their investments.
The secondary bondholders have accused the Caesars Entertainment Group of asset stripping its subsidiary prior to filing from bankruptcy and, despite losing a court case for the bankruptcy hearing to be conducted in Delaware where it would be harder for Caesars to protect its assets, several other rulings have gone in their favor – potentially dragging Caesars down with its subsidiary.
Caesars Asset Stripping Goes under the Microscope
In May, U.S. Bankruptcy Judge Benjamin Goldgar approved the appointment of Richard Davis to investigate the asset stripping claims. Davis previously worked for the U.S. Treasury Department and was part of the Watergate Special Prosecution Force in the 1970s, so he knows a thing or two about uncovering deceit. Caesars tried to restrict Davis´ mandate, but their attempts back-fired.
The investigation and Caesars own legal costs are estimated to be costing the company $1 million per day, and – as the Caesars Entertainment Group is not protected from litigation by the bankruptcy proceedings of its subsidiary – the secondary bondholders have been issuing lawsuits against the parent company to recover more than $7 million of loan guarantees.
In June, Caesars´ financial advisors warned that the parent company would be forced to file its own Chapter 11 proceedings if it did not get some protection from the courts. If the warning was intended to gain some sympathy from the courts, that also back-fired. On July 22, Judge Goldgar made it clear that the Caesars Entertainment Group could not hide behind its subsidiary´s bankruptcy, exposing the company to crippling liabilities.
Harry Reid Tries to Change the Law to Say Thank You
Caesars Entertainment Group has been a major financial contributor to Nevada State Senator Harry Reid and, in what has been interpreted as a thank you for all the money, the Senate Democratic Minority Leader attempted to introduce an amendment to the Trust Indenture Act of 1939 that would have enabled Caesars to continue with its restructuring proposals irrespective of the lawsuits.
The Trust Indenture Act of 1939 was introduced at the end of the Great Depression to protect bondholders when the company they had invested in became insolvent. Under Reid´s proposed amendment, a backdoor would allow the Caesars Entertainment Group to wriggle out of its financial liabilities – thus saving its resorts from being sold off and saving thousands of jobs – in Nevada.
Unfortunately for Caesars, when Reid tried to slip his proposals into end-of-year, must-pass Omnibus legislation, fellow Senate Democrats – under strong lobbying from representatives of the secondary bondholders – kicked out his proposals. Bad news for Caesars, but definitely good news for those to whom the company owes billions of dollars.
The bankruptcy proceedings are currently scheduled to continue when Richard Davis completes his investigations into the allegations of asset stripping. His investigation will determine whether Caesars considered its creditors´ best interests before transferring assets out of Caesars Entertainment Operating Co. and whether the parent company will get deeper into trouble than they already are.