The motion of Caesars Entertainment Operating Co. (CEOC) to schedule a hearing on the adequacy of the company’s proposed disclosure statement for May 9 came under fire from key stakeholder groups in the company’s Chapter 11 proceedings this week, who argued that the company’s proposed schedule would not provide enough time to respond to the shake-up in the case that creditors anticipate will follow the filing of the examiner’s report.
As reported, the court appointed examiner, New York–based attorney Richard Davis, is investigating, among other things, whether the transactions undertaken by the company and its parent, Caesars Entertainment Corp. (CEC), in the year and a half prior to the Chapter 11 filing are avoidable either as preferential transactions or fraudulent conveyances.
Davis has said he would file his report by March 14 at the latest.
The resolutions of the disputes that Davis is probing are expected to ultimately determine recoveries for the company’s creditors, most directly the company’s second-lien and unsecured creditors who contend that if the transferred assets at the heart of the investigation are deemed to be available to satisfy their claims, their recoveries would be greatly increased over the current deal on the table.
Senior lenders would presumably see their recoveries altered, as well, in kind if not in amount, as the structure of the company’s proposed plan would likely change.
Beyond the four corners of CEOC’s Chapter 11, Davis’ findings would also potentially have a negative effect on CEC’s stock price, to the extent that CEC’s assets are used to satisfy claims against CEOC.
The company and CEC, for their part, have been to seeking to block pending litigation in federal court in New York and Delaware challenging the CEC transactions, in the hopes that the company could confirm reorganization plan before an adverse decision is rendered.
As reported, CEOC’s Chapter 11 filing last January halted the litigation against it, but the cases were allowed to proceed against CEC, which was not part of the Chapter 11 filing. That put pressure on the parent—indeed, CEC warned that if the lawsuits were allowed to go forward, it could be forced to file Chapter 11 as well—to contribute funding to a CEOC reorganization plan that could be used for distributions to junior creditors, but the company has been unable to meet the demands of second-lien and unsecured creditors, especially given the potential payday that awaits if they prevail in the pending lawsuits.
The dynamic changed last month, however, when the bankruptcy court issued a temporary injunction blocking the New York case, which was ready to go to go to trial, from moving forward, at least through May 9, in order to give the parties in the CEOC Chapter 11 time to reach a consensual resolution following the filing of Davis’ report.
Broadly, Davis’s report is expected to provide an impartial assessment of the relative strengths of the competing legal arguments among the parties in the asset transfer disputes, and is widely seen as the key to a consensual reorganization plan.
As reported, the company last week named a former federal judge from Delaware, Joseph Farnan, Jr., to oversee mediation in the case once Davis’ report is filed.
Against this backdrop, the company asked the bankruptcy court last week to set a disclosure statement hearing for May 9 and a plan confirmation hearing for Aug. 15 in order to “position these cases—whether on a fully consensual basis or not—[to confirm a plan] within the exclusivity periods.” In order to meet that schedule, the company said it would file a potentially revised reorganization plan and disclosure statement by April 4.
The company has the exclusive right to propose a reorganization plan through July 15, and a corresponding exclusive right to solicit acceptances to a plan through Sept. 17. Those deadlines are the maximum exclusivity periods permitted under the Bankruptcy Code.
While none of the stakeholder responses to the company’s proposed timetable gave an indication of specific conclusions Davis might have reached in his report, they do suggest that Davis’ report will be substantial, and will require a renegotiation of the existing reorganization plan.
The stakeholders say, further, that the company’s proposed schedule would not provide them with enough time, given the complexity of the issues in the case and the volume of evidence, to digest the report’s contents and develop that new reorganization plan.
According to the unsecured creditors’ committee, Davis’ report is expected to be 1,000 pages long.
The official committee of second-lien lenders argued, “Before any party has even had the chance to review the relevant plan and related disclosure statement, the debtors ask the court to impose a severely-constrained (and admittedly ‘somewhat unusual’) timetable that, among other things, would provide parties with the bare minimum of twenty-eight days to assess and object to a massive disclosure document that will include brand new information regarding the examiner’s report (which has not been issued), the recommendation of the governance committee concerning the appropriateness of the agreements previously negotiated with CEC, the governance committee’s report on its investigation (the results of which have not been disclosed), and the “marketing” process orchestrated to enable the Debtors to proceed with an adversarial ‘new value’ plan, not to mention revisions to the plan resulting from those critical new developments.”
Meanwhile, the indenture trustee for the company’s unsecured notes argued that the compressed timetable would not only fail to provide enough time to reach a deal, the setting of such a restricted deadline would make consensus more difficult to reach from the get-go.
“The relief sought by the debtors in the motion could, in fact, hinder the prospects for peace at the outset,” the trustee, Wilmington Trust, argued. “The motion seeks to require all parties to participate in a highly-compressed timetable for litigation concerning approval of the debtors’ proposed disclosure statement and plan. To have the greatest chance of success, mediation will require the full attention and resources of all participating parties. Requiring all parties to prepare for, and engage in, litigation about plan issues while attempting to reach consensus on that plan will discourage the constructive engagement that mediation requires.”
With friends like these…
In evaluating the opposition of the second-lien lenders and unsecured noteholders to the company’s timetable, it is worth noting that they are the very same parties that are litigating with the company over the challenged CEC transactions, and that their recoveries would be most directly determined by the outcome of the litigation.
In short, their opposition to a compressed confirmation is to be expected.
Perhaps more concerning for the prospects of the company’s proposed reorganization plan, and the company’s hopes of potentially pushing through a non-consensual reorganization plan ahead of the New York and Delaware litigation, if necessary, is the fact that the company’s first-lien lenders and first-lien noteholders, groups that have provided long-standing backing to the company throughout the Chapter 11 case, appear ready to jump ship as well.
The ad hoc committee of first-lien noteholders, for example, said that “the considerable delays in these cases and the weakening in the debt and equity markets since negotiation (and renegotiation) of [their RSA with the company] have caused a very substantial decline in the value of the debt and equity securities proposed to be distributed to the first lien noteholders thereunder.”
The ad hoc panel said the decline in the bond and equity securities, which “comprise a majority of first lien noteholder recoveries, … will have a material adverse impact upon the value of the total consideration first lien noteholders were to have received.”
Noting that a number of milestone deadlines in the Noteholder RSA have already been missed, the ad hoc panel said it has informed the company that unless the RSA is “amended promptly to, among other things, adequately address, and correct for, the significant value lost in the debt and equity securities contemplated to be issued to the first lien noteholders, the milestones in the RSA will not be extended, exposing the RSA to potential termination.”
The ad hoc group said that it would make “little sense” to go forward with a disclosure statement hearing because it would not be “at all efficient to initiate a plan solicitation process where the definitive first lien noteholder support for the underlying plan is no longer in hand.”
Similarly, the ad hoc committee of first-lien bank lenders—the creditor constituency most firmly in the company’s corner to date—also balked at the company’s proposed timetable.
“As the ad hoc bank lender committee has previously stated in its filings with the court, given the continual delay in these cases, the lack of progress in negotiations with other junior constituents, and the state of the credit markets, the likelihood that the Bank RSA in its current form can continue to form the foundation for a consensual plan of reorganization in these cases has vastly diminished.”
Notably, the bank panel said, the company has already missed certain milestone deadlines under the Bank RSA, “and the … committee has not agreed to any extension of the milestone or waiver of the default related thereto.”
Among the concerns raised by the bank lenders is that they may be forced to object to the revised reorganization plan that emerges following Davis’ report, and the proposed time limits “are far too short to be practicable.” — Alan Zimmerman
This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.
Follow LCD News on Twitter