Trustee Sues Caesars for 'Unimaginably Brazen Corporate Looting'

Troubled casino operator Caesars Entertainment Corp. (CZR) has been hit with a 207-page lawsuit by UMB Bank NA, the trustee for $1.25 billion in 8.5% senior secured notes due Feb. 15, 2020, which is alleging "unimaginably brazen corporate looting."

The lawsuit was filed Tuesday in the Delaware Chancery Court against private equity-backed Caesars, based in Las Vegas, as well as its operating unit, Caesars Entertainment Operating Co. (CEOC), and other subsidiaries, including Caesars Entertainment Resort Properties LLC, Caesars Acquisition Co., Caesars Growth Partners LLC and Caesars Enterprise Services LLC.

In filing the lawsuit, UMB is seeking the appointment of a receiver for CEOC.

Several Caesars executives, including Caesars CEO and chairman Gary Loveman, and Caesars general counsel, Michael Cohen, were also named in the suit.

According to the lawsuit, "This is a case of unimaginably brazen corporate looting and abuse perpetrated by irreparably conflicted management."

A UMB spokeswoman Wednesday declined comment, but the trustee said in the lawsuit that Caesars has "stripped CEOC of eight of its most valuable hotel, casino and entertainment properties — including a six-property stronghold in the heart of the Las Vegas Strip — on terms that were patently unreasonable in order to enrich themselves at the expense of CEOC's creditors."

UMB is alleging that Caesars has robbed CEOC of more than $4 billion in value, "leaving CEOC's longstanding creditors with no hope of being repaid."

Caesars spokesman, Stephen Cohen at Teneo Strategy, responding early Tuesday evening, said by phone, "We believe the claims in this lawsuit are baseless and that this filing is an attempt to derail constructive talks that the company is having concerning a restructuring of CEOC and we will defend ourselves vigorously."

Just days before the lawsuit was filed, UMB on Nov. 21 served CEOC with a default notice on the $1.25 billion in notes. The trustee demanded that the default be remedied immediately and warned that holders of at least 30% in principal of the 8.5% notes could choose to accelerate their debt. Caesars Entertainment said in filings with the Securities and Exchange Commission on Nov. 24 it doesn't believe a default has occurred.

In a report on Nov. 24, CreditSights Inc. analyst Chris Snow said that the lawsuit is surprising, given speculation that there was an agreement in the works with the first-lien creditor groups.

Still on the table in restructuring negotiations is a plan to turn CEOC into a REIT.

"Now that the complaint is out in the open, it is more difficult to understand what is happening behind closed doors," Snow wrote.

The lawsuit also accused Caesars Entertainment transferring assets to other Caesars subsidiaries through M&A deals "for staggeringly inadequate consideration."

The transferred assets UMB is targeting in the lawsuit include six marquee Las Vegas properties that formed an exceptionally valuable stronghold at the very center of the Las Vegas Strip: Planet Hollywood, the Quad, Linq, the Cromwell, Bally's Las Vegas, and the Octavius Tower at Caesars Palace. Also mentioned were two of CEOC's most promising properties outside of Las Vegas: the Horseshoe Baltimore and Harrah's New Orleans.

Snow said that the list of infractions against Caesars Entertainment is long in the complaint, including the company's "M&A over the past several years, the strip[ping] of the parent guarantee [of CEOC's debt], the creation of ServicesCo, the issuance of the B-7 term loan, and the transactions involving the 2015, 2016 and 2017 maturities, among others."

He noted that the remedies proposed by UMB are also long, as the trustee is seeking the unwinding of M&A deals, reinstatement of the parent guarantee, avoidance of ServicesCo transfers, as well as the appointment of a receiver for CEOC and a declaration that CEOC was insolvent "for all periods during which the company executed the M&A transaction," Snow wrote in the report.

When reached by phone Wednesday, Snow said that the lawsuit is similar to one that the second-lien bondholders filed against CEOC in August in the Delaware Chancery Court, but that this latest one is "more robust" and "very strongly worded."

He said that the UMB lawsuit could have been filed either to put more pressure on Caesars Entertainment or it could mean that there is some "splintering among the first-liens."

In the lawsuit, UMB said that, "CEOC's slavish obedience to the self-serving whims of its parent, CEC, and the sponsors is indefensible. Every day defendants maintain control over CEOC is another opportunity to strip out the last remaining value from CEOC's decaying carcass while simultaneously running the clock on the preference and fraudulent transfer look-back periods in advance of CEOC's inevitable collapse into bankruptcy."

Private equity firms Apollo Global Management LLC and TPG Capital bought a majority stake in Caesars Entertainment for $30.7 billion in 2008, leaving the casino operator with more debt than it can support.

The suit claims that CEOC's financial difficulties date back to the "original gamble" the sponsors made in 2008 when they relied on excess leverage to buy the company.

An Apollo spokesman declined to comment, as did a TPG Capital spokeswoman.

Caesars Entertainment admitted in a Nov. 14 regulatory filing that it expects CEOC to only have enough cash to get part of the way through the fourth quarter of 2015, and that the unit needs to pursue options such as a Chapter 11 bankruptcy. On its balance sheet, CEOC has about $6.16 billion in bank loans, roughly $6.35 billion in first-lien bonds, and about $5.44 billion in second-lien bonds.

First-lien bondholders Elliott Management Corp., Pacific Investment Management Co. LLC, BlackRock Inc., Brigade Capital Management LLC, Beach Point Capital Management LP and DDJ Capital Management LLC formed a steering committee to conduct restructuring talks in September.

Sources have said they expect Caesars to skip a $225 million interest payment that is due to second-lien bondholders on Dec. 15, and then file for Chapter 11 bankruptcy around Jan. 14, before the grace period on the missed payment ends but after the 90-day waiting period that would be necessary from a legal perspective after granting a lien on the cash on CEOC's balance sheet to first-lien creditors on Oct. 16.

Caesars Entertainment's Nasdaq-listed stock, which closed at $16.31 on Tuesday, was up more than 6%, to $17.36, in midday trading Wednesday.

UMB's counsel David E. Ross at Seitz Ross Aronstam & Moritz LLP couldn't be reached for comment.

— Lisa Allen contributed to this report.

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