NEW YORK (The Deal) -- The second-lien bondholders who served Caesars Entertainment (CZR) operating unit with a notice of default on Friday, June 6 have brought the casino giant one step closer to addressing long-brewing bondholder disputes.
The group has also taken issue with the casino operator's dismissal of them as a mere minority group.
Bruce Bennett, the Jones Day partner who is advising the second-lien group, commented via e-mail, saying, "Although the indenture allows 30% of the holders of a relevant issue to give notice of defaults, the notice delivered yesterday was given by holders of more than 50% of the largest issue of [Caesars Entertainment Operating Co.] second-lien notes, not holders of a minority."
Caesars acknowleged the notice of default from the group of holders of $3.7 billion in 10% second-lien notes due Dec. 15, 2018 issued by the company's operating subsidiary, Caesars Entertainment Operating Co. (CEOC), in a regulatory filing Friday.
The notice claims that certain asset sales out of their subsidiary constitute a default, as does the release of the parent company's guarantee of CEOC's debt.
Caesars also responded to the notice of default with a statement Friday: "We will not allow our company, our employees and the communities in which we operate to be held hostage by a minority of holders whose interests are contrary to the long-term health of the company."
The notes governed by that second-lien indenture account for about $3.7 billion of CEOC's total $18 billion debt load.
Sources see the default notice as a maneuver for the second-lien group, which includes hedge funds Canyon Capital Advisors LLC, Oaktree Capital Management LLC and Appaloosa Management LP, to get a seat at the negotiating table.
"We see merits in the bondholder allegations and we see the notice as a necessary first step to pursue creditor rights in the face of the aggressive actions by the sponsors," debt research firm CreditSights Inc. said in a June 8 report.
Creditsights believes the second-liens are making a case that, if it is correct, would benefit second-lien and first-lien bondholders at CEOC, but would be negative for classes of first-lien bank debt, legacy bonds and bonds issued by two other subsidiaries, Caesars Entertainment Resort Properties LLC and Caesars Growth Partners LLC.
If this notice of default forced CEOC to file for bankruptcy in the near-term, when it is "flush with cash," that outcome would have "mixed" benefit for creditors, CreditSights said. "[Creditors] would have enhanced recoveries...but they would otherwise have received this cash as coupon payments over the next couple of years."
Creditsights understands that Caesars has 60 days to respond to the default notice.
For now, the casino operator is providing limited commentary on its legal argument against the bondholders.
"Recent transactions, including the sale of assets to Caesars Growth Partners LLC, followed a rigorous, independent process which garnered fair value for CEOC and provided it with liquidity crucial to its business and capital structure plans," Caesars' said in its statement on Friday June 6.
The company also stressed that independent directors, legal advisers and finanical advisers already determined that its asset sales complied with its bond indentures.
CreditSights believes that it would be difficult to prove that asset sales out of CEOC were made below fair market values, especially since the transactions were approved by independent advisers.
Caesars said on Friday that the removal of the parent guarantee doesn't constitutue a default either. "The guarantee was included in the indentures at [Caesars Entertainment Corp.]'s request to allow the use of consolidated financial statements, not to provide credit support," the company said in its statement.
According to the CreditSights report, "We believe the company is on less steady ground as it relates to the strip of the parent guarantee, since the strip relies on ambiguous language in the [bond] indenture."
Nonetheless, the research firm believes that Caesars' actions have "evaporated any goodwill in the creditor community."
A team at Sullivan & Cromwell LLP that includes Andrew Dietderich is advising a group of CEOC's legacy bondholders.
Kenneth Eckstein and Thomas Moers Mayer of Kramer Levin Naftalis & Frankel LLP are advising a group of CEOC's first-lien bondholders.
A Caesars spokesman and officials at Kramer Levin and Sullivan Cromwell didn't respond to requests for comment.
Private equity firms Apollo Global Management LLC and TPG Capital LP bought a majority stake in Caesars for $30.7 billion in 2008.