The long-anticipated examiner’s report on Caesars said that the parent company of the gaming chain orchestrated transactions to drive the business towards bankruptcy to the detriment of the Caesars Entertainment Operating Company (CEOC) and its creditors.
The examiner, Richard Davis, in the court-ordered report, said he investigated fifteen transactions between the CEOC and its parent Caesars Entertainment Corp (CEC) and the buyout sponsors, Apollo Global Management and TPG.
“The principal question being investigated was whether in structuring and implementing these transactions, assets were removed from the CEOC to the detriment of CEOC and its creditors,” the 1,787-page report issued yesterday (15 March) said. “The simple answer to this question is ‘yes.’ As a result, claims of varying strength arise out of these transactions for constructive fraudulent transfers, actual fraudulent transfers (based on intent to hinder or delay creditors) and breaches of fiduciary duty by CEOC directors and officers and CEC,” the report continued.
Apollo and TPG bought Caesars with $6 billion in cash and $22 billion in debt in early 2008. It became clear over the next few years that following the financial crisis, the business was not as strong as was needed to support the kind of growth that the private equity owners needed to pay down debt and ready the business for their exit.
In October 2013 and May 2014, CEOC transferred ownership or stakes in some entities to other units within the business. In November 2014, Caesars revealed that it did not expect to have enough cash to continue servicing its roughly $23 billion debt pile.
In late 2014, it came to a restructuring agreement with some creditors to transfer much of its hotel property holdings into a new real estate investment trust that would be handed over to lenders but there were holdouts, many of whom accused Apollo and TPG of stripping assets from CEOC for their own benefit ahead of the inevitable debt restructuring.
Since then, litigation has held up the restructuring for over a year. Davis’ report is expected to be pivotal in deciding the outcome of much of those court proceedings.
As well as ordering cash payments, the court also has the right to reverse some of the asset transfers, “particularly where damages are difficult to calculate”, the report said.
CEC issued a statement disagreeing with the findings. “We believe the evidence shows that each of the challenged transactions was undertaken to strengthen CEOC and provide it with the liquidity and resources required to sustain it and give it time to recover from unprecedented market challenges. These transactions provided immense and indisputable benefit to CEOC and its creditors, who received billions of dollars in principal and interest payments,” said the statement.
Spokesmen for TPG and Apollo also said they disagreed with the examiners conclusions.
“The fundamental dispute relates to the valuation of the assets involved in the relevant transactions, as to which in all instances the Caesars board relied on independent valuation experts and outside legal counsel. In all regards TPG acted properly, in good faith and with the underlying belief that the relevant transactions preserved value for all Caesars stakeholders. TPG intends to vigorously defend against any claims that might be asserted,” said TPG’s statement.
“We believe that Apollo Investment Management VI acted appropriately and in good faith to help Caesars Entertainment Operating Company strengthen its capital structure, achieve substantial deleveraging, extend its economic runway and create value for itself and its employees, creditors, vendors and other stakeholders,” the Apollo statement said.