EX-99.T3E-1 2 d200770dex99t3e1.htm EXHIBIT T3E-1 Exhibit T3E-1

Exhibit T3E-1

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

 

 

   )   
In re:    )    Chapter 11
   )   
CAESARS ENTERTAINMENT OPERATING    )    Case No. 15-01145 (ABG)
COMPANY, INC., et al.1    )   
   )   

Debtors.

   )    (Jointly Administered)

 

   )   

DISCLOSURE STATEMENT FOR THE DEBTORS’

SECOND AMENDED JOINT PLAN OF REORGANIZATION

PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE

 

 

THIS IS NOT A SOLICITATION OF AN ACCEPTANCE OR REJECTION OF THE PLAN WITHIN THE

MEANING OF SECTION 1125 OF THE BANKRUPTCY CODE. ACCEPTANCES OR REJECTIONS OF

THE PLAN MAY NOT BE SOLICITED UNTIL A DISCLOSURE STATEMENT HAS BEEN APPROVED

BY THE BANKRUPTCY COURT. THIS DRAFT DISCLOSURE STATEMENT HAS NOT BEEN

APPROVED BY THE BANKRUPTCY COURT

 

 

James H.M. Sprayregen, P.C.    Paul M. Basta, P.C.
David R. Seligman, P.C.    Nicole L. Greenblatt, P.C.
KIRKLAND & ELLIS LLP    KIRKLAND & ELLIS LLP
KIRKLAND & ELLIS INTERNATIONAL LLP    KIRKLAND & ELLIS INTERNATIONAL LLP
300 North LaSalle    601 Lexington Avenue
Chicago, Illinois 60654    New York, New York 10022
Telephone:             (312) 862-2000    Telephone:            (212) 446-4800
Facsimile:              (312) 862-2200    Facsimile:             (212) 446-4900
Counsel to the Debtors and Debtors in Possession   
Dated: June 28, 2016   

 

 

1  A complete list of the Debtors and the last four digits of their federal tax identification numbers may be obtained at https://cases.primeclerk.com/CEOC.


 

IMPORTANT INFORMATION FOR YOU TO READ

 

THE DEADLINE TO VOTE ON THE PLAN IS

October 31, 2016, at 4:00 p.m. (prevailing Central Time).

FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE ACTUALLY RECEIVED BY PRIME

CLERK BEFORE THE VOTING DEADLINE AS DESCRIBED HEREIN

This disclosure statement (this “Disclosure Statement”) provides information regarding the Debtors’ Plan,2 which the Debtors seek to have confirmed by the Bankruptcy Court. A copy of the Plan is attached hereto as Exhibit A. Unless otherwise noted, all capitalized terms used but not otherwise defined in this Disclosure Statement have the meanings ascribed to them in the Plan. The rules of interpretation set forth in Article I.B of the Plan govern the interpretation of this Disclosure Statement.3

The consummation and effectiveness of the Plan are subject to certain material conditions precedent described herein and set forth in Article IX of the Plan. There is no assurance that the Bankruptcy Court will confirm the Plan or, if the Bankruptcy Court does confirm the Plan, that the conditions necessary for the Plan to go effective will be satisfied or otherwise waived.

You are encouraged to read this Disclosure Statement (including Article IX hereof entitled “Risk Factors”) and the Plan in their entirety before submitting your Ballot to vote on the Plan.

The Bankruptcy Court’s approval of this Disclosure Statement does not constitute a guarantee by the Bankruptcy Court of the accuracy or completeness of the information contained herein or an endorsement by the Bankruptcy Court of the merits of the Plan.

Summaries of the Plan and statements made in this Disclosure Statement are qualified in their entirety by reference to the Plan. The summaries of the financial information and the documents annexed to this Disclosure Statement or otherwise incorporated herein by reference are qualified in their entirety by reference to those documents. The statements contained in this Disclosure Statement are made only as of the date of this Disclosure Statement, and there is no assurance that the statements contained herein will be correct at any time after such date. Except as otherwise provided in the Plan or in accordance with applicable law, the Debtors are under no duty to update or supplement this Disclosure Statement.

The Debtors are providing the information in this Disclosure Statement to Holders of Claims and Interests for purposes of soliciting votes to accept or reject the Debtors’ Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code. In the event of any inconsistency between the Disclosure Statement and the Plan, the relevant provisions of the Plan will govern. Nothing in this Disclosure Statement may be relied upon or used by any entity for any other purpose. Before deciding whether to vote for or against the Plan, each Holder entitled to vote should carefully consider all of the information in this Disclosure Statement, including the Risk Factors described in Article IX.

 

 

2  As used herein, “Plan” means the Debtors’ Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, a copy of which is attached as Exhibit A to this Disclosure Statement and incorporated herein by reference, as it may be altered, amended, modified, or supplemented from time to time in accordance with the terms of Article IX thereof, and including all exhibits thereto and the Plan Supplement. Capitalized terms used but not otherwise defined herein have the meanings given to them in the Plan.
3  The Debtors have proprietary rights to a number of trademarks used in this Disclosure Statement that are important to their businesses, including, without limitation, Caesars, Caesars Entertainment, Caesars Palace, Harrah’s, Total Rewards, Horseshoe, Paris Las Vegas, Flamingo, and Bally’s. This Disclosure Statement may omit the registered trademark (®) and trademark (™) symbols for such trademarks named herein.


The Debtors urge each Holder of a Claim or Interest to consult with its own advisors with respect to any legal, financial, securities, tax, or business advice in reviewing this Disclosure Statement, the Plan, and each proposed transaction contemplated by the Plan.

This Disclosure Statement contains, among other things, summaries of the Plan, certain statutory provisions, certain events in the Debtors’ Chapter 11 Cases, and certain documents related to the Plan, attached hereto and/or incorporated by reference herein. Although the Debtors believe that these summaries are fair and accurate, they are qualified in their entirety to the extent that they do not set forth the entire text of such documents or statutory provisions or every detail of such events. In the event of any inconsistency or discrepancy between a description in this Disclosure Statement and the terms and provisions of the Plan or any other documents incorporated herein by reference, the Plan or such other documents will govern for all purposes. Factual information contained in this Disclosure Statement has been provided by the Debtors’ management except where otherwise specifically noted. The Debtors do not represent or warrant that the information contained herein or attached hereto is without any material inaccuracy or omission.

The Debtors have prepared this Disclosure Statement in accordance with section 1125 of the Bankruptcy Code, Bankruptcy Rule 3016(b), and Local Bankruptcy Rule 3016-1 and is not necessarily prepared in accordance with federal or state securities laws or other similar laws.

The Debtors did not file this Disclosure Statement with the Securities and Exchange Commission (the “SEC”) or any state authority. Neither the SEC nor any state authority has passed upon the accuracy or adequacy of this Disclosure Statement or upon the merits of the Plan. The securities to be issued on or after the effective date will not have been the subject of a registration statement filed with the SEC under the Securities Act of 1933, as amended (the “Securities Act”) or any securities regulatory authority of any state under any state securities law (“Blue Sky Law”). The securities to be issued will be issued pursuant to the Plan in reliance on section 4(a)(2) of the Securities Act and similar Blue Sky Law provisions, as well as, to the extent applicable, the exemption from the Securities Act and equivalent state law registration requirements provided by section 1145(a)(1) of the Bankruptcy Code, to exempt the offer and the issuance of new securities in connection with the solicitation of the Plan from registration under the Securities Act and Blue Sky Law.

In preparing this Disclosure Statement, the Debtors relied on financial data derived from the Debtors’ books and records and on various assumptions regarding the Debtors’ businesses. Although the Debtors believe that such financial information fairly reflects the financial condition of the Debtors as of the date hereof and that the assumptions regarding future events reflect reasonable business judgments, the Debtors make no representations or warranties as to the accuracy of the financial information contained in this Disclosure Statement or assumptions regarding the Debtors’ businesses and their future results and operations. The Debtors expressly caution readers not to place undue reliance on any forward-looking statements contained herein.

This Disclosure Statement does not constitute, and should not be construed as, an admission of fact, liability, stipulation, or waiver. The Debtors may seek to investigate, file, and prosecute Claims and may object to Claims after the Confirmation or Effective Date of the Plan irrespective of whether this Disclosure Statement identifies such Claims or objections to Claims.

The Debtors are making the statements and providing the financial information contained in this Disclosure Statement as of the date hereof, unless otherwise specifically noted. Although the Debtors may subsequently update the information in this Disclosure Statement, the Debtors have no affirmative duty to do so, and expressly disclaim any duty to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. Holders of Claims and Interests reviewing this Disclosure Statement should not infer that, at the time of their review, the facts set forth herein have not changed since this Disclosure Statement was filed. Information contained herein is subject to completion, modification, or amendment. The Debtors reserve the right to file an amended or modified Plan and related Disclosure Statement from time to time, subject to the terms of the Plan.

 

ii


The Debtors have not authorized any entity to give any information about or concerning the Plan other than that contained in this Disclosure Statement. The Debtors have not authorized any representations concerning the Debtors or the value of their property other than as set forth in this Disclosure Statement.

If the Bankruptcy Court confirms the Plan and the Effective Date occurs, the terms of the Plan and the Restructuring Transactions contemplated by the Plan will bind the Debtors, any person acquiring property under the Plan, all Holders of Claims and Interests (including those Holders of Claims and Interests that do not submit Ballots to accept or reject the Plan or that are not entitled to vote on the Plan), and any other person or entity as may be ordered by the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code.

 

 

QUESTIONS AND ADDITIONAL INFORMATION

 

If you would like to obtain copies of this Disclosure Statement, the Plan, or any other solicitation materials or publicly filed documents in the Chapter 11 Cases, or if you have any questions about the solicitation and voting process or the Chapter 11 Cases generally, please contact the Debtors’ Notice and Claims Agent, Prime Clerk LLC by (i) email at ceocballots@primeclerk.com, (ii) calling (855) 842-4123 within the United States or Canada or, outside of the United States or Canada, by calling +1 (646) 795-6969, (iii) visiting https://cases.primeclerk.com/CEOC, or (iv) writing to Prime Clerk LLC, 830 Third Avenue, 3rd Floor, New York, New York 10022.

Any Ballot received after the Voting Deadline, or otherwise not in compliance with the Solicitation Procedures set forth in the Solicitation Procedures Order will not be counted.

 

iii


TABLE OF CONTENTS

 

         Page  

ARTICLE I. EXECUTIVE SUMMARY

     1   

A.

 

Introduction

     1   

B.

 

Development of the Debtors’ Proposed Plan

     2   

C.

 

Plan Overview

     5   

D.

 

Creditor Recoveries

     7   

E.

 

Plan Contingencies

     12   

F.

 

Marketing Process

     13   

G.

 

Recommendation

     14   

ARTICLE II. BACKGROUND TO THE CHAPTER 11 CASES

     14   

A.

 

The Debtors’ Businesses

     14   

B.

 

The Debtors’ Corporate Structure, Parent, and Affiliates

     17   

C.

 

Management of the Debtors

     20   

D.

 

The Debtors’ Capital Structure

     24   

ARTICLE III. EVENTS LEADING TO THE CHAPTER 11 FILINGS

     27   

A.

 

Economic Challenges

     27   

B.

 

Certain Prepetition Challenged Transactions

     29   

C.

 

Recent and Impending Property Closures

     29   

D.

 

Litigation Regarding Challenged Transactions and CEC’s Guarantees

     29   

E.

 

Prepetition Restructuring Negotiations and Prepetition RSA

     32   

F.

 

Proposed Merger of CEC and CAC

     33   

G.

 

The Debtors’ Financial Outlook and Business Strategy Going Forward

     34   

ARTICLE IV. MATERIAL EVENTS OF THE CHAPTER 11 CASES

     34   

A.

 

Involuntary Chapter 11 Proceedings

     34   

B.

 

First Day Pleadings and Certain Related Relief

     35   

C.

 

Appointment of Official Committees

     40   

D.

 

Special Governance Committee Investigation

     41   

E.

 

The Examiner

     51   

F.

 

Mesirow Financial Consulting’s Role in the SGC Investigation

     57   

G.

  Positions of CEC, the Sponsors, the Second Priority Noteholders Committee, and the Ad Hoc Group of 5.75% and 6.50% Notes Regarding the Challenged Transactions      60   

H.

 

Value of CEC Contributions

     70   

I.

 

The Second Lien Standing Motion

     70   

J.

 

Development of the Proposed Restructuring and Plan

     71   

K.

 

Marketing Process

     79   

L.

 

Exclusivity

     81   

M.

 

Mediation

     82   

N.

 

The Lien Standing Challenges

     82   

O.

 

The 1111(b) Claim Objections

     83   

P.

 

Debtors’ Objections to Second Lien Notes Claims

     84   

Q.

 

Claims Bar Date and the Claims Objection Process

     88   

R.

 

Deferred Compensation Plan Issues

     89   

S.

 

Adversary Proceedings and Contested Matters

     91   

T.

 

Other Pending Litigation Proceedings

     99   

U.

 

Monetizing the Former Harrah’s Tunica Property

     99   

 

i


V.

 

Workload Bonus Program

     99   

W.

 

Rejection and Assumption of Executory Contracts and Unexpired Leases

     100   

X.

 

Postpetition Letter of Credit Facility

     101   

Y.

 

Debtors’ Monthly Operating Reports

     102   

ARTICLE V. SUMMARY OF THE PLAN

     102   

A.

 

Proposed Treatment of Each Class of Claims and Interests

     102   

B.

 

Proposed Distributions to Holders of Allowed Claims and Interests

     106   

C.

 

Timing and Calculation of Amounts to Be Distributed

     115   

D.

 

Process for Dealing with Disputed Claims

     116   

E.

 

The Separation Structure

     116   

F.

 

Sources of Recovery

     117   

G.

 

Shared Services

     127   

H.

 

Master Lease Agreements

     127   

I.

 

Management and Lease Support Agreements

     127   

J.

 

Transition Services Agreement

     128   

K.

 

Corporate Governance

     128   

L.

 

Right of First Refusal Agreement

     129   

M.

 

PropCo Call Right Agreement

     129   

N.

 

The Bank Guaranty Settlement

     129   

O.

 

Subsidiary-Guaranteed Notes Settlement

     130   

P.

 

Unsecured Creditors Committee Settlement

     130   

Q.

 

Adequate Protection and Operating Cash for OpCo and the REIT

     131   

R.

 

General Settlement and Discharge of Claims, Interests, Causes of Action, and Controversies

     132   

S.

 

Ordinary Course of Business Through the Effective Date

     132   

T.

 

The Debtor Release, Third-Party Release, Exculpation, and Injunction

     132   

U.

 

Retention of Causes of Action

     135   

V.

 

Treatment of Executory Contracts and Unexpired Leases

     136   

ARTICLE VI. SOLICITATION AND VOTING PROCEDURES

     140   

A.

 

Solicitation Packages

     140   

B.

 

Voting Rights

     141   

C.

 

Voting Procedures

     142   

D.

 

Ballots and Master Ballots Not Counted

     143   

ARTICLE VII. FIRST LIEN CREDITOR ELECTIONS

     143   

A.

 

PropCo Preferred Equity Put Election

     143   

B.

 

PropCo Equity Election

     144   

C.

 

Plan Supplement

     144   

ARTICLE VIII. CONFIRMATION OF THE PLAN

     144   

A.

 

Confirmation Hearing

     144   

B.

 

Requirements for Confirmation of the Plan

     145   

C.

 

Acceptance by Impaired Classes

     152   

D.

 

Confirmation without Acceptance by All Impaired Classes

     152   

ARTICLE IX. RISK FACTORS

     154   

A.

 

Certain Bankruptcy Law Considerations

     154   

B.

 

Risk Factor Regarding the NRF Claim

     156   

 

ii


C.

 

Risk Factor Regarding the Proposed Merger Between CEC and CAC

     156   

D.

 

Second Priority Noteholders Committee Risk Factor Regarding the CEC Consideration

     157   

E.

 

Risk Factors Regarding Lack of Injunction of Parent Guaranty Litigation

     157   

F.

 

Risk Factors and Considerations Regarding the Companies’ Businesses and Operations

     157   

G.

 

Risk Factors and Considerations Regarding PropCo’s, CPLV Sub’s, and the REIT’s Businesses and Operations

     162   

H.

 

Risk Factors and Considerations Regarding the Companies’ Financial Condition

     163   

I.

 

Risk Factors and Considerations Regarding the Separation of the Debtors into OpCo, PropCo, and the REIT

     166   

J.

 

Risk Factors and Considerations Regarding the Status of the REIT as a Real Estate Investment Trust

     168   

K.

 

Risk Factor Relating to Appeal and Equitable Mootness

     173   

L.

 

Risks Relating to the New Debt

     173   

M.

 

Risks Relating to the New Interests Under the Plan

     181   

N.

 

Risks Relating to the New CEC Common Stock and New CEC Convertible Notes

     185   

O.

 

Risks Related to the Marketing Process

     188   

P.

 

Risk Factor Related to the Deferred Compensation Settlement

     188   

Q.

 

Disclosure Statement Disclaimer

     189   

R.

 

Liquidation Under Chapter 7

     190   

ARTICLE X. CERTAIN SECURITIES LAW MATTERS

     190   

A.

 

Issuance of Securities under the Plan Pursuant to the Plan:

     190   

B.

 

Subsequent Transfers of Securities Issued under the Plan

     192   

ARTICLE XI. CERTAIN UNITED STATES INCOME TAX CONSEQUENCES OF THE PLAN

     193   

A.

 

Introduction

     193   

B.

 

Certain Federal Income Tax Consequences of the Plan to the Debtors

     194   

C.

 

Certain Federal Income Tax Consequences of the Plan to U.S. Holders of Allowed Claims and Interests

     195   

D.

 

Certain Federal Income Tax Consequences of the Plan to Non-U.S. Holders of Allowed Claims and Interests

     207   

E.

 

Certain REIT Tax Considerations, Including Certain Dividend Requirements

     208   

F.

 

Tax Aspects of REITCo’s Ownership of PropCo

     220   

G.

 

Ownership and Disposition of the PropCo LP Interests

     221   

H.

 

Ownership and Disposition of New CEC Common Equity and New CEC Convertible Notes

     223   

I.

  Ownership and Disposition of New CEC Convertible Notes and Conversion of New CEC Convertible Notes Into New CEC Common Equity      224   

J.

 

Constructive Distributions to Holders of New CEC Common Equity and New CEC Convertible Notes

     226   

K.

 

Withholding and Reporting

     226   

 

iii


EXHIBITS

 

EXHIBIT A    Debtors’ Second Amended Joint Plan of Reorganization
EXHIBIT B    Corporate Structure of the Debtors and Certain Non-Debtor Affiliates as of the Petition Date
EXHIBIT C    Contribution Analysis
EXHIBIT D    Liquidation Analysis
EXHIBIT E    Financial Projections
EXHIBIT F    Valuation Analysis
EXHIBIT G    Debtors’ Consolidated Annual Financial Statements
EXHIBIT H    Examiner Report Introduction and Executive Summary
EXHIBIT I    Standalone Plan Analysis
EXHIBIT J    New CEC Financial Projections
EXHIBIT K    Second Priority Noteholders Committee Summary of Examiner Report
EXHIBIT L    Excerpt of March 16, 2016 Hearing Transcript

 

iv


ARTICLE I.

EXECUTIVE SUMMARY

 

  A. Introduction

The proposed Plan achieves a complicated but tax-efficient corporate and balance sheet restructuring that maximizes the value of the Debtors’ two primary assets: their businesses and the estate causes of action against Caesars Entertainment Corporation (“CEC”), Caesars Acquisition Company (“CAC”), other non-Debtor affiliates, and certain third parties (the “Estate Claims”). Rather than expose the Debtors and their stakeholders to the risks of potentially value-destructive litigation with affiliates, the Plan provides for a global settlement of the Debtors’ claims and causes of action against CEC and its affiliates by securing substantial contributions from CEC and its affiliates to support significant near-term recoveries (in both quantum and form of consideration) to all of the Debtors’ stakeholders. Importantly, the value-maximizing REIT structure and associated creditor recoveries contemplated by the proposed Plan rely on significant cash and non-cash contributions, as well as ongoing credit support, from CEC and its affiliates, which contributions are conditioned upon, and would not be available without, releases for CEC and its affiliates. In exchange for the releases essential to the proposed global settlement embodied in the Plan, CEC and its affiliates are providing contributions that the Debtors estimate have a midpoint value of $4.0 billion, as more fully discussed in the contribution analysis attached hereto as Exhibit C. The Debtors, informed by the conclusions of the investigation conducted by the independent Special Governance Committee of the Board of Directors of CEOC (the “Special Governance Committee”) and the findings of the Bankruptcy Court-appointed Examiner’s final report, believe these contributions represent a fair and reasonable settlement is in the best interest of the Debtors and their estates, that sufficient to support the releases included in the Plan, and will be prepared to meet their burden on these issues at confirmation.4

The Debtors have evaluated alternative transaction structures, including a standalone reorganization structure that would allow for parallel litigation against CEC and its affiliates through the formation of a litigation trust to pursue the Estate Claims. As set forth more fully in an analysis attached hereto as Exhibit I, however, separating the Debtors from the broader Caesars enterprise involves complicated operational challenges and is likely to result in both decreased financial performance and lower distributable value. Moreover, without the contributions from CEC and its affiliates, the Debtors would have to provide a greater portion of recoveries in equity instead of the significant cash and debt recoveries to first lien creditors contemplated by the Plan, and the Debtors cannot force secured creditors to accept an equity recovery on account of their collateral without their consent. Indeed, after careful analysis, the Debtors and the Special Governance Committee have determined that no alternative provides better value for the Debtors and their Estates, especially on a risk-adjusted basis, than the proposed Plan.

The Debtors have been engaged in extensive negotiations with their stakeholders as part of an ongoing mediation process. As a result of this process, the Unsecured Creditors Committee, certain holders of Subsidiary-Guaranteed Notes Claims, CEC, and CAC, have agreed to restructuring support agreements demonstrating their support of the Plan, and certain holders of Prepetition Credit Agreement Claims entered into an amended restructuring support agreement reaffirming their support of the Plan. Moreover, the holders of more than 80 percent in amount of First Lien Notes Claims are party to a restructuring support agreement with the Debtors and CEC, though that agreement is terminable because the Debtors have missed milestones under the agreement and the terms of the Plan provide different (and improved) recoveries for the Holders of First Lien Notes Claims. Notably, because the Plan contemplates that Holders of First Lien Notes Claims receive recoveries in equity, to avoid a difficult cramdown fight, the support of such Holders will be important for achieving confirmation of the Plan. See Bankruptcy Code § 1129(b)(2)(A).

As of the date hereof, the Ad Hoc Committee of First Lien Noteholders, the Second Priority Noteholders Committee, BOKF, Frederick Barton Danner, and the Ad Hoc Group of 5.75% and 6.50% Notes do not support the Plan. The Ad Hoc Committee of holders of 12.75% Second Lien Notes, which collectively hold more than the majority of the face amount of such notes, also does not support the Plan, and would encourage other holders of the 12.75% Second Lien Notes to vote against the Plan.

 

4  The Special Governance Committee’s investigation, including its conclusions, the claims of various creditors that the work of the Special Governance Committee is tainted and not credible (and their assertions that the Bankruptcy Court has found it not credible), and the Debtors’ view that the work of the Special Governance Committee is valuable and credible, is described in detail in Article IV.D and Article IV.F below.


Because the proposed Plan maximizes creditor recoveries, meaningfully reduces the Debtors’ aggregate debt (by approximately $10 billion), and best positions the Debtors’ businesses for future success, the Debtors encourage you to vote to accept the Plan.

 

  B. Development of the Debtors’ Proposed Plan

CEOC is a majority-owned operating subsidiary of CEC; the remaining Debtors are direct and indirect subsidiaries of CEOC. CEC, together with its subsidiaries (including the Debtors) and its affiliates, is the world’s most diversified casino-entertainment company (collectively, “Caesars”). Caesars owns and operates or manages 50 casinos in five countries on three continents, with properties in the United States, Canada, the United Kingdom, South Africa, and Egypt. The Debtors, for their part, own and operate or manage 38 gaming and resort properties in fourteen states and five countries, operating primarily under the Caesars®, Harrahs®, and Horseshoe® brand names. The Debtors employ approximately 32,000 people.

The Debtors’ capital structure is the result of a $30.7 billion leveraged buyout—one of the largest in history (the “2008 LBO”)—that was completed just as the global economy took a precipitous downturn. The Debtors’ significant debt load following the 2008 LBO hampered their ability to confront the challenges brought on by decreased consumer spending, increased competition in Las Vegas and local geographic markets, and system-wide revenue declines, including significant declines in the Atlantic City market. Despite implementing dozens of cost-cutting initiatives and executing numerous capital markets transactions, the Debtors were unable to achieve an out-of-court solution to their financial distress.

As of the Petition Date, the Debtors’ outstanding funded debt obligations totaled approximately $18 billion (excluding accrued and unpaid interest), and comprise the following classes of claims:

 

    Four tranches of first lien bank debt totaling approximately $5.35 billion (the “Prepetition Credit Agreement Claims”);5

 

    Three series of outstanding first lien notes totaling approximately $6.35 billion (the “First Lien Notes Claims”);

 

    Four series of outstanding second lien notes totaling approximately $5.25 billion (the “Second Lien Notes Claims”);

 

    One series of subsidiary-guaranteed unsecured notes of approximately $479 million (the “Subsidiary-Guaranteed Notes Claims”); and

 

    Two series of senior unsecured notes totaling approximately $530 million (the “Senior Unsecured Notes Claims”).

Additionally, certain of the Debtors’ funded debt creditors are party to various intercreditor agreements, which govern, among other things, the payment, priority, rights, and remedies among and available to such creditors. The following table illustrates the Debtors’ outstanding funded debt as of the Petition Date, including the applicable maturities and interest rates for each tranche of debt.

 

5  CEC has a contractual obligation to guarantee collection (rather than payment) of the Prepetition Credit Agreement Claims.

 

2


As of January 15, 2015  

CEOC Debt ($ in Millions)

   Maturity      Interest Rate     Face Value6  

Term Loan B4

     2016         10.50   $ 376.7   

Term Loan B5

     2017         5.95     937.6   

Term Loan B6

     2017         6.95     2,298.8   

Term Loan B7

     2017         9.75     1,741.3   
       

 

 

 

Prepetition Credit Agreement

          5,354.4   

11.25% First Lien Notes

     2017         11.25     2,095.0   

8.50% First Lien Notes

     2020         8.50     1,250.0   

9.00% First Lien Notes

     2020         9.00     3,000.0   
       

 

 

 

First Lien Notes

          6,345.0   

12.75% Second Lien Notes

     2018         12.75     750.0   

10.00% Second Lien Notes due 2018

     2018         10.00     3,680.5   

10.00% Second Lien Notes due 2018

     2018         10.00     804.1   

10.00% Second Lien Notes due 2015

     2015         10.00     3.7   
       

 

 

 

Second Lien Notes

          5,238.3   

10.75% Senior Subsidiary-Guaranteed Notes

     2016         10.75     478.6   
       

 

 

 

Subsidiary-Guaranteed Notes

          478.6   

6.50% Senior Unsecured Notes

     2016         6.50     296.7   

5.75% Senior Unsecured Notes

     2017         5.75     233.3   
       

 

 

 

Senior Unsecured Notes

          530.0   

Capitalized Lease Obligations

     to 2017         Various        15.4   

Special Improvement District Bonds

     2037         5.30     46.9   

Other Unsecured Funded Debt

     2016–2021         0–6.00     24.7   
       

 

 

 

Other General Borrowings

          87.0   
       

 

 

 

Total Funded Debt

        $ 18,033.3   

The Debtors’ significant funded debt obligations are not sustainable. Between 2009 and the Petition Date, the Debtors’ annual interest expenses have far exceeded their annual EBITDA; in 2014 alone, the Debtors generated approximately $800 million of EBITDA compared with more than $2.2 billion of interest expense. Put simply, although the Debtors’ businesses remain operationally strong and cash-flow positive with higher levels of EBITDA in 2015, they simply cannot service a capital structure with approximately $18 billion of funded debt. This capital structure must be materially deleveraged to optimize the value of the Debtors’ businesses going forward.

The Debtors also have another important asset around which to reorganize: valuable Estate Claims. Specifically, certain of the prepetition transactions executed by Caesars purportedly to assist the Debtors in meeting interest obligations, extending debt maturities, and transferring debt and capital expenditure obligations have been the subject of investigations by the Special Governance Committee and the Bankruptcy Court-appointed Examiner.

 

6 

These figures do not include accrued and unpaid interest as of January 15, 2015. The total Allowed Claim amounts can be found in Article V.A.

 

3


As described further herein, both the Special Governance Committee and the Examiner have determined that the Debtors’ estates have valuable claims and causes of action against CEC and its non-Debtor affiliates related to certain of these transactions—important estate assets that must be maximized through litigation or settlement as part of any restructuring. In developing the Plan, the Debtors have focused on maximizing the value of both the Debtors’ business and litigation assets, while also recognizing the complexity of reconciling those two objectives.

On the business side, the Plan contemplates the transformation of the Debtors’ business into a real estate investment trust (or REIT) structure that offers tax and other advantages resulting in higher valuations for REITs than comparable non-REIT companies, allowing the Debtors to deliver additional value to their stakeholders. The Debtors believe, and no party other than the Second Priority Noteholders Committee has disputed, that maximizing the benefits of the proposed REIT structure and optimizing the form of consideration distributed to creditors (i.e., greater amounts of cash and debt and equity with a higher overall value) is best achieved through the credit support to be provided by “New CEC” (the new CEC entity created through CEC’s merger with CAC) under the Plan. Specifically, the Plan contemplates that New CEC will make substantial contributions to the Debtors’ reorganization, including to guarantee OpCo’s monetary obligations under the Master Lease Agreements, which underpin the REIT’s ability to support the more than $6 billion of debt contemplated in the Plan. In addition, New CEC will also provide a guarantee, if necessary, in respect of the OpCo debt, which will assist the Debtors in syndicating such debt and support any “take-back” debt that would be issued under the Plan if the Debtors’ first lien creditors agree to waive the OpCo debt syndication requirement. New CEC Financial Projections can be found in Exhibit J.

With respect to the Estate Claims, in parallel with the development of the Plan, the Special Governance Committee commenced a comprehensive investigation into the Estate Claims beginning in August 2014. As described further in Article IV.D herein, the SGC Investigation evolved over time as the Special Governance Committee and its advisors obtained more documents and information to consider. In connection with the Debtors’ entry into the Prepetition RSA, the Special Governance Committee agreed, based on the preliminary findings of its investigation at that time and subject to the satisfactory conclusion of such investigation after receiving all of the outstanding information it had requested, that the Estate Claims had significant value and that CEC’s contributions to the then-proposed plan of reorganization—valued at no less than $1.5 billion at the time—were sufficient to settle such claims. As discussed further below, subsequent to entering into the Prepetition RSA, based on continued negotiations among CEC, the Special Governance Committee, and the Debtors’ senior creditors, CEC agreed to make significant additional contributions while the Special Governance Committee continued its investigation, which were reflected in prior iterations of the Plan. The Plan contemplates contributions from CEC and its affiliates that the Debtors estimate have a midpoint value of $4.0 billion, as calculated in accordance with the contribution analysis attached hereto as Exhibit C. The Special Governance Committee believes this amount provides for a fair and reasonable settlement that is well within the ranges of values supportive of the releases contemplated by the Plan. As described in Article IV.F, certain creditors have asserted that the Special Governance Committee’s investigation is not credible, but the Debtors strongly disagree.

As described further in Exhibit I, the Debtors, through the Special Governance Committee and with the assistance of financial advisor and investment banker Millstein & Co., L.P. (“Millstein”) and AlixPartners, also evaluated alternative transaction structures, including standalone reorganization structures that would allow for parallel litigation against CEC through the formation of a litigation trust or otherwise (including a standalone REIT unsupported by CEC’s contributions). In evaluating value-maximizing alternatives, the Debtors and their senior stakeholders also recognized that, given the existing enterprise structure, any plan that separates CEOC from the broader Caesars enterprise, or that maintains the enterprise structure while CEOC prosecutes litigation claims against its affiliates, has business and implementation risk that are substantially greater than the risks inherent in the proposed Plan. A reorganization supported by the Debtors’ existing parent, on the other hand, has several business benefits, including (i) minimizing the risk of triggering significant tax obligations that could arise in a deconsolidated scenario, (ii) both increasing the likelihood and accelerating the timing of the Debtors obtaining regulatory approvals for their proposed restructuring transactions, (iii) ensuring the Debtors’ continued access to enterprise shared services and experienced gaming employees, and (iv) maintaining the benefits of the Debtors’ important Total Rewards® loyalty program and inclusion in the broader Caesars property network, which drive enhanced operating and financial performance. For all of these reasons, the Debtors determined that maximizing the value of their business assets can best be achieved by ensuring the continued support of CEC (and its affiliates)—who are also the primary targets of the Estate Claims.7

 

 

7  Given the existing structural and operational affiliations among CEOC and CEC, as well as the need for CEC to compensate the Debtors on account of Estate Claims, the Debtors believe that CEC is the best candidate to provide the necessary credit support for the value-maximizing REIT structure. Nevertheless, as discussed in Article I.F and Article IV.K below, the Debtors are conducting a marketing process to, among other things, determine whether there is any other third party whose involvement could result in better recoveries to creditors, both in form and amount.

 

4


Moreover, none of the extremely valuable CEC contributions to be made pursuant to the Plan will be available to the Debtors in the near term in the absence of either (i) a global settlement resolving both Estate Claims and certain direct claims held by third parties, including claims related to CEC’s any purported guaranty of the Debtors’ prepetition debt (the “Third-Party Claims”), or (ii) a release of the Estate Claims and the Third-Party Claims through the Plan. For obvious reasons, the cash and credit support contemplated by the proposed Plan simply will not work if claims against the credit parties (i.e., CEC and CAC) are not released. And not surprisingly, CEC and its affiliates have conditioned their substantial financial and credit support for any proposed plan on securing releases of such claims. Put simply, CEC and its affiliates will not voluntarily make a multi-billion dollar contribution to the Debtors’ restructuring efforts without obtaining these releases.

The Debtors determined (subject to the market test described below) that there is no value-maximizing alternative to the proposed Plan, under which the Debtors will settle estate litigation claims through significant contributions to these estates, including important credit support for the REIT structure.

 

  C. Plan Overview8

To effectuate the Plan, the Debtors will, among other things convert their prepetition corporate structure into two companies—OpCo and PropCo. The primary features of the credit-enhanced REIT structure contemplated by the Plan are as follows:

 

    PropCo, as a subsidiary of a REIT entity, will directly or indirectly own substantially all of the Debtors’ real property assets and related fixtures. Caesars Palace Las Vegas will be owned by “CPLV,” a separate subsidiary of PropCo.9

 

    OpCo will, other than with respect to certain properties and operations contributed to a taxable REIT subsidiary of the REIT entity, lease the real property and fixtures pursuant to two master lease agreements (the “MLAs”), one with PropCo and one with CPLV, and will manage the Debtors’ properties and facilities on an ongoing basis. OpCo will continue to own substantially all operations, gaming licenses, personal property, and other related interests.

 

    The reorganized Debtors will remain part of the overall Caesars enterprise, and New CEC will provide guarantees of OpCo’s payments under the two MLAs and of new OpCo debt issued in connection with the Plan.

 

 

8  The Plan is described more fully herein and this overview of the Plan is qualified in its entirety by reference to the Plan and the more detailed overview provided in this Disclosure Statement.
9  CPLV will be a separate entity to facilitate third-party financing.

 

5


A combination of new debt, preferred shares, and common shares issued by the REIT, PropCo, OpCo, and the CPLV Entities,10 as applicable, as well as cash, convertible debt securities and direct equity issued by New CEC,11 as applicable, will be used to provide distributions to creditors under the Plan. The proposed corporate and capital structure as of the Effective Date is depicted in the chart below, which summarizes the projected total leverage based on projected funded debt obligations of OpCo, PropCo, and the CPLV Entities upon consummation of the Plan.12 Before taking into account the PropCo Equity Election, the Debtors estimate that the funded debt across each of OpCo, PropCo, and the CPLV Entities will total approximately $8,170 million to $8,287 million. The following illustrative organizational chart summarizes the organizational structure of the reorganized entities, including their new capital structure, on the Effective Date:13

 

LOGO

To achieve the leverage necessary to support distributions under the Plan, the Plan is conditioned upon New CEC making significant contributions to the Debtors’ reorganization. These contributions include direct contributions to the estate to settle claims and facilitate the credit-enhanced REIT structure, as well as direct contributions to creditors to enhance recoveries. Specifically, on behalf of itself and its non-Debtor affiliates, the Plan contemplates New CEC making the following contributions:14

 

10  References in this executive summary to PropCo equity (both common and preferred) refer to equity that likely will be issued by the REIT as REIT stock, provided that in certain circumstances described in detail below and in the Plan, such equity may instead be issued by PropCo itself as PropCo LP Interests.
11  Specifically, creditors will receive preferred shares of CEOC that will be exchanged for shares of New CEC pursuant to a merger of CEOC into a newly-formed subsidiary of New CEC (the “CEOC Merger”).
12  The Plan contemplates that certain debt issued by OpCo and the CPLV Entities will be syndicated to third parties for cash, which cash will be distributed to fund creditor recoveries, and that PropCo will issue new debt directly to the Debtors’ creditors on the terms agreed in the RSAs. To the extent that the Debtors are unable to syndicate the entirety of the new OpCo debt, and subject to waivers by the Requisite Consenting Bank Lenders and/or the Requisite Consenting Noteholders, the Plan contemplates OpCo issuing new debt directly to the Debtors’ creditors, for which debt CEC will provide a guarantee. Similarly, to the extent that the Debtors are unable to syndicate the entirety of the new CPLV debt, the Plan contemplates the CPLV Entities issuing new debt directly to the Debtors’ creditors in an amount required to make up the shortfall, subject to certain limitations.
13  For illustrative purposes only, the following chart reflects pro forma ownership interests under the Spin Structure. The following chart does not reflect PropCo Common LP Interests or PropCo Preferred LP Interests that may be issued to certain Holders of Claims to the extent such Holders would own more than 9.8% of the stock issued by the REIT, subject to certain waiver provisions as discussed in greater detail below. All dollar amounts are in millions.
14  Importantly, CEC will fund contributions under the Plan, in part, from access to cash that it will obtain through the proposed merger with CAC. Certain of the direct and indirect subsidiaries of CAC would also be targets of certain of the Estate Claims.

 

6


    $406 million in direct cash contributions to fund Plan distributions, other restructuring transactions contemplated by the Plan, and general corporate purposes, and up to an additional $6.5 million to fund distributions to certain classes of the Debtors’ unsecured creditors;

 

    Committing (with no associated fee) to purchase 100% of OpCo common equity and—if the REIT structure is accomplished through the “partnership contribution structure”—5% of PropCo common equity;

 

    Call rights to PropCo to purchase the Harrah’s Laughlin, Harrah’s Atlantic City and Harrah’s New Orleans properties, which have been extended for five years;

 

    A guarantee of OpCo’s MLA payment obligations, which underpins the value of PropCo and its ability to service the debt it will carry;

 

    A guarantee of OpCo debt, if necessary, to reduce the syndication risk on such debt;

 

    $1 billion of convertible notes issued by New CEC;

 

    Preemptive rights to participate in the New CEC Capital Raise;

 

    Up to 53.1% of New CEC Common Equity (including New CEC Common Equity convertible through the New CEC convertible notes), which will be provided upon exchange of new CEOC preferred stock in connection with the CEOC merger; and

 

    A waiver by CAC of its recoveries on approximately $293 million of Senior Unsecured Notes.

In the aggregate, the Debtors, based on an analysis by Millstein more fully explained in Exhibit C, estimate the midpoint value of these contributions at approximately $4.0 billion if Class F votes to reject the Plan and $4.3 billion if Class F votes to accept the Plan. Because some of CEC’s contributions to the Debtors under the Plan take the form of direct credit support, such as the guarantee of OpCo’s operating lease obligations, the Plan is explicitly conditioned upon obtaining (i) a global settlement of all claims the Debtors may have against CEC or certain of its affiliates and (ii) comprehensive releases for CEC and its affiliates for claims or causes of action that the Debtors’ creditors may have against CEC and its affiliates, including with respect to any obligations CEC may have related to guarantees of CEOC’s debt. The Debtors believe that the value of the contributions is sufficient to support the releases included in the Plan, including the release of Estate and Third-Party Claims, and will be prepared to meet their burden on this issue at confirmation.

The Plan also contains a number of additional provisions not highlighted in this executive summary. Please refer to Article V hereof for a more detailed summary of the Plan.

 

  D. Creditor Recoveries

As discussed more fully herein and in the Plan, the Plan generally provides for the following recoveries to be shared pro rata among the holders of claims in the various classes:15

 

15  As discussed in detail below and in the Plan, creditor recoveries and the applicable allocation of Plan consideration are subject to, among other things, each voting Class’s acceptance of the Plan, various put, call, and other election rights in the Plan as well as the syndication requirements and waivers built into the Plan. For illustrative purposes only, and solely for purposes of this Article I.D, the following descriptions and summaries of recoveries and allocation of Plan consideration assume the following (unless expressly stated otherwise): (a) the Debtors successfully syndicate $2.0 billion of CPLV Market Debt and all of the OpCo debt to third parties for cash; (b) the First Lien Bank Lenders do not make the CPLV Mezzanine Election, and (c) each Class votes to accept the Plan. Additionally, all recovery percentages value the various components of Plan consideration at Plan value and the amount of debt is shown before taking the PropCo Equity Election into account. Importantly, certain of the securities being issued (particularly the equity securities) could trade at prices above or below Plan value.

 

7


    First Lien Bank Lenders: Approximately $3,193 million of cash, $1,961 million of first lien PropCo debt, $250 million of second lien PropCo debt, and 5% of New CEC Common Equity on a fully diluted basis (subject to reduction to 4% of New CEC Common Equity if the Holders of Second Lien Notes Claims vote to accept the Plan); provided that if this class waives the Plan’s syndication requirement with respect to the OpCo debt, certain cash recoveries could be replaced by OpCo “take back” debt on the terms specified in the Plan.

 

    First Lien Noteholders: Approximately $2,037 million of cash, $431 million of first lien PropCo debt, $1,425 million of second lien PropCo debt, preferred equity in PropCo (subject to certain put and call rights), $100 million of CPLV Mezzanine Debt, 100% of PropCo Common Equity on a fully diluted basis, and 15.8% of New CEC Common Equity (subject to reduction to 12.5% of New CEC Common Equity if the Holders of Second Lien Notes Claims vote to accept the Plan, provided that in that scenario such Holders will receive either Cash in the amount of $20,000,000 per month and/or OpCo Series A Preferred Stock, which shall be exchanged for New CEC Common Equity of a value equal to $20,000,000 per month (at a price per share of New CEC Common Equity using an implied equity value for New CEC of $6.5 billion), in both instances commencing on May 1, 2017, and ending on the Effective Date, which amount shall be prorated for any partial month); provided that if this class waives the Plan’s syndication requirement with respect to the OpCo debt, certain cash recoveries could be replaced by OpCo “take back” debt on the terms specified in the Plan.

 

    Non-First Lien Claimants: The Plan contemplates that the following seven groups of Non-First Lien Claims will share recoveries from the same form of consideration: (i) the Second Lien Notes Claims; (ii) the Subsidiary-Guaranteed Notes Claims; (iii) the Senior Unsecured Notes Claims; (iv) Undisputed Unsecured Claims at the non-BIT Debtors; (v) Disputed Unsecured Claims at the non-BIT Debtors; (vi) Insurance Covered Unsecured Claims at the non-BIT Debtors; and (vii) General Unsecured Claims at the BIT Debtors.16 These claims have been separately classified to reflect distinct creditor rights, priorities, or proposed treatment and will thus receive varying amounts of the following (collectively, the “Non-First Lien Recovery Consideration”):

 

    each applicable class’s share, as set forth in the Plan, of $1.0 billion of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 12.2% of New CEC Common Equity on a fully diluted basis; and

 

    OpCo Series A Preferred Stock, which shall be exchanged for up to 24.4% of New CEC Common Equity on a fully diluted basis (after accounting for dilution by the New CEC Convertible Notes but before any New CEC Capital Raise and assuming all Classes vote yes) pursuant to the CEOC Merger.

 

 

16 

The “BIT Debtors” are those Debtors at which, based on the Liquidation Analysis, the Debtors have determined that Holders of General Unsecured Claims are entitled to higher recoveries than Holders of General Unsecured Claims at other Debtors. The BIT Debtors include (a) the Par Recovery Debtors, (b) Winnick Holdings, LLC, (c) Caesars Riverboat Casino, LLC, and (d) Chester Downs Management Company, LLC.

 

8


Generally, the Non-First Lien Claimants will share a Pro Rata portion of the Non-First Lien Recovery Consideration. However, Holders of Undisputed Unsecured Claims and Disputed Unsecured Claims, if they vote as a Class to accept the Plan, will also receive Cash from the Unsecured Creditor Cash Pool (which will be comprised of up to approximately $6.2 million contributed by New CEC) on the terms set forth in the Plan. Similarly, Holders of Insurance Covered Unsecured Claims, after accounting for insurance, will also receive Cash from the Unsecured Insurance Creditor Cash Pool (which will be comprised of up to approximately $300,000 contributed by New CEC) on the terms set forth in the Plan. In addition, with respect to the Par Recovery Unsecured Claims, Winnick Unsecured Claims, Caesars Riverboat Casino Unsecured Claims, and Chester Downs Management Unsecured Claims, Holders of such Claims shall receive Non-First Lien Recovery Consideration in an amount equal to 100%, 67%, 71%, and 87%, respectively, of such Holders’ Claim.17 And Subsidiary-Guaranteed Notes Claims will receive Non-First Lien Recovery Consideration in an amount equal to approximately 85% (midpoint) of such Holders’ Claims. The Convenience Unsecured Claims will receive recoveries from the Convenience Cash Pool, which consists of $12.5 million, and will not receive any recoveries from the Non-First Lien Recovery Consideration. Additionally, the Non-Obligor Unsecured Claims will receive payment in full in cash due to the fact that the Non Obligor Debtors are not liable for any of the Debtors’ funded debt obligations.

The following pie charts illustrate the approximate allocation of the various forms of Plan consideration (cash, debt, and equity) that comprise the recovery of each class of funded debt and unsecured claims:

 

Class A – 100% Recovery    Class B – 100% Recovery
LOGO    LOGO

 

 

17  As described more fully in Article VIII.B.2 and Exhibit D, the Debtors have carefully reviewed the result of their Liquidation Analysis and have determined that certain of the Debtor entities, including the Non-Obligor Debtors, the Par Recovery Debtors, Winnick Holdings, LLC, Caesars Riverboat Casino, LLC, and Chester Downs Management Company, LLC are likely to achieve greater recoveries in a liquidation scenario than those otherwise available to Holders of Non-First Lien Claims under the Plan. Recoveries for these Debtors have been adjusted accordingly under the Plan.

 

9


Class C – 100% Recovery  

Class D – Prepetition Credit Agreement Claims 18

Class F Rejects – 113% - 117% Recovery

Class F Accepts – 112% - 115% Recovery

LOGO   LOGO

Class E – Secured First Lien Notes Claims1

Class F Rejects – 96% - 128% Recovery

Class F Accepts – 94% - 124% Recovery

 

Class F – Second Lien Notes Claims

Accept: 29% - 48% Recovery

Reject: 22% - 34% Recovery

LOGO   LOGO

Class G – Subsidiary-Guaranteed Notes Claims

61%-105% Recovery

 

Class H – Senior Unsecured Notes Claims

Accept: 33% - 56% Recovery

Reject: 22% - 33% Recovery

LOGO   LOGO

 

18  Pie chart reflects consideration split in scenario where Class F rejects the Plan

 

10


Class I – Undisputed General Unsecured Claims

Accept: 34% - 54% Recovery

Reject: 22% - 33% Recovery

 

Class J – Disputed General Unsecured Claims

34% - 54% Recovery

LOGO   LOGO

Class K – Convenience Class Claims

46% Recovery

 

Class L – Insurance Covered Unsecured Claims

34% - 54% Recovery

LOGO   LOGO

Classes M-P – Unsecured Claims against BIT Debtors

67% - 100% Recovery

LOGO

Importantly, the Plan is a joint plan of reorganization for all Debtors in the Chapter 11 Cases, and the Plan takes into account the different rights and claim priorities at each Debtor in allocating recoveries as well as the various intercreditor arrangements between the Debtors’ various funded debt stakeholders. The recoveries described above are improved recoveries based on each respective Class voting to accept the Plan. Recoveries under the Plan may be less for Holders of Claims in a particular Class if that Class does not vote to accept the Plan.

 

11


For a further description of the classification, exact proposed treatment, distributions, voting rights, and projected recoveries of Claims against and Interest in the Debtors, as well as the timing and calculation of amounts to be distributed under the Plan, the sources and uses of such distributions, and the process for handling Disputed Claims, please see Article V.D hereof and the Plan.

 

  E. Plan Contingencies

Although, subject to the marketing process described below, the Debtors believe that the settlement and restructuring proposed in the Plan is the best alternative for maximizing stakeholder recoveries, the Plan is subject to a number of conditions and there are certain material risks to the Debtors’ ability to implement the Plan and consummate near-term creditor distributions, including the following:

 

    Syndication Requirement: The Plan contains a material financing contingency in that the Debtors have agreed to syndicate OpCo and CPLV debt to third parties so that at least $3,335 million in Cash proceeds are distributed to first lien creditors. Although requisite holders of the Debtors’ first lien debt may waive the syndication requirements with respect to certain debt and agree to accept “take back” paper on the terms specified in the Plan, there are no guarantees that the Debtors will be able to satisfy their syndication obligations or that creditors will waive the syndication requirement.

 

    CEC Merger with Caesars Acquisition Company: CEC has agreed to provide substantial contributions to the Debtors’ restructuring through direct contributions to the estate, consideration in the form of cash and securities directly to the Debtors’ creditors, and important ongoing credit support for the REIT structure. On December 22, 2014, CEC entered into a merger agreement with CAC, which merger will provide CEC with access to cash necessary to fund its obligations to the Debtors as contemplated by the Plan. Moreover, the combined value of the merged CEC-CAC underlies the value of the CEC securities to be issued in connection with the Plan. This merger of two public companies, however, remains subject to ongoing negotiation. In particular, the Debtors expect that independent committees of the boards of directors of CEC and CAC will review the terms of the CEC-CAC merger to ensure each receives maximum residual value for their respective public shareholders. Put simply, the amount of New CEC Common Equity given to CEOC creditors could impact the viability of the merger. The Debtors are focused on ensuring that the Plan obtains the greatest possible consideration from both CEC and CAC on account of the Estate and Third-Party Claims while maintaining the viability of the merger to ensure such contributions. If CEC is unable to complete this merger for any reason, CEC will not be able to meet its funding obligations under the Plan and the feasibility of the Plan would be threatened.

 

    Third-Party Releases: To facilitate the substantial contributions that CEC is making in support of the Debtors’ reorganization, the Plan is predicated on, and dependent upon, the settlement of all of the Debtors’ claims and causes of action against, among others, the CEC Released Parties,19 as well as releases of certain claims third parties may have against, among others, the CEC Released Parties. Such releases include, among other things, any claims and causes of action related to CEC’s purported guarantees of the Debtors’ funded debt obligations, which are subject to the pending Parent Guarantee Litigation.20 Various third parties, including certain of the parties to the Parent Guarantee Litigation, have informed the Debtors that as of the date of this Disclosure Statement, they object to the release of their claims against CEC on account of CEC’s purported guarantees. If CEC’s guarantee obligations are reinstated in the Parent Guarantee Litigation, there is a material risk that CEC may be unwilling or unable to make the contributions contemplated by the Plan. The Parent Guarantee Litigation also poses a material risk to the Debtors’ ability to obtain the Third-Party Releases proposed in the Plan. As described in Article VIII.B.1, below, the Second Priority Noteholders Committee believes that the

 

19  The CEC Released Parties include, among others, certain non-Debtors, the Sponsors, and associated individuals.
20 

As discussed more fully in Article IV.S.1 herein, on June 15, 2016, the Bankruptcy Court granted an injunction staying the commencement of trials in certain of the Parent Guarantee Litigation until August 29, 2016.

 

12


 

forced, involuntary release of the guarantee claims is illegal and contrary to establish law because, among other things, Second Priority Noteholders are not being compensated in any way for the individual rights and claims they have against CEC that would be released and eliminated under the Plan. The Ad Hoc Committee of holders of 12.75% Second Lien Notes agrees with the position of the Second Priority Noteholders Committee. Similarly, Mr. Danner joins in these contentions as it applies to the holders of 6.50% Senior Unsecured Notes and the Ad Hoc Group of 5.75% and 6.50% Notes likewise joins these contentions for the holders of Senior Unsecured Notes.

 

    Lack of First Lien Noteholder Support: The members of the Ad Hoc Committee of First Lien Noteholders represent to hold or otherwise control approximately 54 percent of the First Lien Notes. As a result, if the First Lien Noteholders vote to reject the Plan, the Plan can only be confirmed if, among other things, it satisfies the cramdown requirements of section 1129(b) of the Bankruptcy Code with respect to the holders of Class E Secured First Lien Notes Claims. Because, among other things, the Plan contemplates that a portion of the consideration to be provided to the Holders of Secured First Lien Notes Claims will take the form of equity securities, it will be difficult for the Debtors to satisfy the requirements of section 1129(b) with respect to Class E because the Debtors cannot force secured creditors to accept an equity recovery on account of their collateral without their consent. Bankruptcy Code § 1129(b)(2)(A). In addition, if Holders of Secured First Lien Notes Claims vote to reject the Plan, the Debtors may not be able to deliver the guaranty release and the waiver of the intercreditor turnover rights contemplated in the Plan. See Article V.F.9. Accordingly, if the members of the Ad Hoc Committee of First Lien Noteholders vote to reject the Plan, the Debtors may not be able to confirm the Plan and deliver the Class treatment otherwise proposed therein. The Debtors reserve all rights with respect to this confirmation issue.

Although these significant contingencies reflect the fragility of the proposed resolution for these complex cases, the Debtors believe that the Plan provides the Debtors and their creditors with the best option to maximize recoveries and enable the Debtors to exit chapter 11 and encourage you to vote to accept the Plan.

The Second Priority Noteholders Committee has requested that the Debtors include the following as an additional risk factor with regard to the Plan:

CEC is under no obligation to make the contribution on which the Plan is premised. It can walk away from its commitment at any time, without consequence or repercussion. CEC or its affiliate, CAC, also can call off their merger, which is a precondition to CEC’s payments under the Plan, at any time. As a result, the Debtors’ ability to consummate the Plan depends, in part, on entities and individuals whom the Examiner found to have breached their fiduciary duties (and aided and abetted others in their breaches) to the Debtors.

The Debtors disagree with the Second Priority Noteholders Committee’s assessment of CEC’s support of the Plan. CEC’s support of the Plan is documented in several places, in particular the recent restructuring support, settlement, and contribution agreement (the “CEC RSA”) described below in Article IV.J.4. The CEC RSA may be terminated by the parties thereto under certain circumstances.

 

  F. Marketing Process

Although the Debtors believe that the Plan maximizes recoveries for the Debtors’ creditors, CEC will own all of the OpCo equity distributed under the Plan. Accordingly, the Plan is likely to be considered a “new value” plan of reorganization under applicable bankruptcy law. Thus, to market test CEC’s investment as required by applicable law—and to otherwise fulfill their obligations as estate fiduciaries by ensuring that there is no better alternative to the existing Plan—the Debtors commenced a process to market test the Plan in November 2015. Through the marketing process, the Debtors, through Millstein, solicited proposals for a potential transaction to acquire the Debtors and their controlled non-Debtor subsidiaries. To date, the Debtors have not received any bids for the entire company (either CEOC’s equity or a sale of all assets). The Debtors have received offers for certain assets; however, none of these offers to date have offered greater value and increased recoveries than those

 

13


recoveries included in the Plan. This marketing process remains ongoing and the Debtors will continue to accept bids from third parties to ensure their ability to maximize value for all stakeholders. To the extent the marketing process results in a higher or otherwise better offer for the Debtors’ businesses, the Debtors reserve the right to amend the Plan in accordance with such offer. The Second Priority Noteholders Committee’s position on the marketing process is described below in Article IV.K.4.

 

  G. Recommendation

The Debtors’ Special Governance Committee has approved the Plan—including the settlements incorporated therein—and believe the Plan is in the best interests of the Debtors’ Estates. As such, the Debtors recommend that all Holders entitled to vote accept the Plan by returning their Ballots and Master Ballots, as applicable, so that Prime Clerk LLC, the Debtors’ notice and claims agent (“Prime Clerk”), actually receives such Ballots or Master Ballots by the Voting Deadline. Assuming the Plan receives the requisite acceptances, the Debtors will seek the Bankruptcy Court’s approval of the Plan at the Confirmation Hearing.

ARTICLE II.

BACKGROUND TO THE CHAPTER 11 CASES.

Below is a summary of the Debtors’ businesses and operations. For additional details concerning the Debtors and the background to the Chapter 11 Cases, please refer to the Debtors’ Memorandum in Support of Chapter 11 Petitions [Docket No. 4] and the Declaration of Randall S. Eisenberg, Chief Restructuring Officer of Caesars Entertainment Operating Company, Inc., in Support of First Day Pleadings [Docket No. 6].

 

  A. The Debtors’ Businesses

 

  1. The Debtors’ Owned and Managed Domestic Properties

The Debtors were founded in 1937, when William F. Harrah opened a small bingo hall in Reno, Nevada. That casino, now called Harrah’s Reno, is still owned and operated by the Debtors. Since then, the Debtors have grown their businesses across the country and around the globe. Today, the Debtors’ core casino offerings are spread across the United States—including strong concentrations in Chicagoland, Nevada, and Atlantic City—as well as throughout the world.

In Nevada, the Debtors own and operate four properties, including their flagship Caesars Palace Property located in the heart of the Las Vegas “Strip.” The Debtors’ other Nevada gaming properties are Harrah’s Reno, Harrah’s Lake Tahoe, and Harveys Lake Tahoe. In total, the Debtors operate approximately 270,000 square feet of gaming space and 6,400 hotel rooms in Nevada, including over 3,600 slot machines and 350 table games.

The Debtors’ Chicagoland locations are an important cash flow driver for their business. The Debtors own and operate two casinos in the Chicagoland market: Horseshoe Casino Hammond in Hammond, Indiana—their second-most profitable casino behind Caesars Palace—and Harrah’s Joliet in Joliet, Illinois. Together, these locations include almost 400,000 square feet of gaming space, more than 200 hotel rooms, more than 4,100 slot machines, and more than 130 table games.

The Debtors also have significant operations in Atlantic City. The Debtors’ presence in Atlantic City dates back to 1979—three years after New Jersey authorized legal gambling—when they opened Caesars Atlantic City and Bally’s Atlantic City. The Debtors also owned and operated a third casino in Atlantic City (the Showboat Atlantic City) until August 2014, when that property was closed and then later sold to a New Jersey university. The Debtors currently have more than 240,000 square feet of gaming space and approximately 2,400 hotel rooms in Atlantic City, including approximately 3,700 slot machines and 320 table games.

Finally, the Debtors own and operate or manage 15 gaming properties in other U.S. locations, including managed properties on Native American reservations. These properties are spread throughout the country but are primarily concentrated in the Midwest and South. In total, these locations include more than 1.0 million square feet of gaming space, 5,000 hotel rooms, 23,000 slot machines, and 1,000 table games.

 

14


Certain of the material properties that the Debtors own include:

 

Nevada

   Illinois and Indiana
Caesars Palace Las Vegas    Las Vegas, NV    Harrah’s Joliet    Joliet, IL
Harrah’s Reno    Reno, NV    Harrah’s Metropolis    Metropolis, IL
Harrah’s Lake Tahoe    Lake Tahoe, NV    Horseshoe Hammond    Hammond, IN
Harveys Lake Tahoe    Lake Tahoe, NV    Horseshoe Southern Indiana    Elizabeth, IN

Iowa and Missouri

   Louisiana and Mississippi
Harrah’s Council Bluffs    Council Bluffs, IA    Harrah’s Gulf Coast    Biloxi, MS
Harrah’s North Kansas City    North Kansas City, MO    Harrah’s Louisiana Downs    Bossier City, LA
Horseshoe Council Bluffs    Council Bluffs, IA    Horseshoe Bossier City    Bossier City, LA
      Horseshoe Tunica    Tunica, MS
   Tunica Roadhouse Hotel &
Casino
   Tunica, MS

New Jersey

    
Bally’s Atlantic City    Atlantic City, NJ   
Caesars Atlantic City    Atlantic City, NJ   

In addition to owning the properties above, the Debtors receive a portion of the management fees associated with certain casinos owned by Caesars Growth Partners, LLC (“CGP”) and managed by Caesars Enterprise Services, LLC (“CES”), including Planet Hollywood Resort and Casino in Las Vegas, The Cromwell (formerly Bill’s Gamblin’ Hall & Saloon) in Las Vegas, The LINQ Hotel & Casino in Las Vegas, Bally’s in Las Vegas, and Harrah’s New Orleans in Louisiana. See Article II.B.4 hereof for a discussion of the corporate functions performed by CES. The Debtors receive fees for managing the Horseshoe Baltimore in Maryland, which is owned by CGP, and certain other non-Debtor properties, including: Harrah’s Ak-Chin (Phoenix, Arizona); Harrah’s Cherokee (Cherokee, North Carolina); Harrah’s Resort Southern California (San Diego, California); Harrah’s Philadelphia (Chester, Pennsylvania); Horseshoe Cincinnati (Cincinnati, Ohio); Horseshoe Cleveland (Cleveland, Ohio); ThistleDown Racino (Cleveland, Ohio); and Conrad Punta del Este Resort and Casino (Punta del Este, Uruguay). Notably, the Debtors’ non-Debtor subsidiaries Horseshoe Cincinnati Management, LLC, Horseshoe Cleveland Management, LLC, and Thistledown Management, LLC (collectively, the “ROC Entities”) are winding down their management of Horseshoe Cincinnati, Horseshoe Cleveland, and the ThistleDown Racino, and will no longer be affiliated with these gaming properties as of June 30, 2016. The ROC Entities will receive management fee payments through June 30, 2016, and a termination payment in December 2016 of $125 million, comprised of $83.5 million in cash and $41.5 million as an offset for certain capital contributions the ROC Entities would otherwise be required to make. Lastly, the Debtor Caesars Entertainment Windsor Limited (“CEWL”) operates Caesars Windsor, a casino owned by the Canadian province of Ontario through the Ontario Lottery and Gaming Corporation.

 

  2. The Debtors’ Partnerships, Multiple-Member LLCs, and Other Strategic Relationships

The Debtors and certain of their non-Debtor subsidiaries are partial equity holders in several strategic relationships, many taking the form of partnerships and limited liability companies, including one of the Debtors—Des Plaines Development Limited Partnership, the owner of Harrah’s Joliet. Des Plaines Development Limited Partnership is a partnership between Debtor Harrah’s Illinois Corporation (80 percent equity interest) and non-Debtor Des Plaines Development Corporation (20 percent equity interest). Located in Joliet, Illinois, Harrah’s Joliet primarily draws customers from the surrounding Chicago metropolitan area. Debtor Harrah’s Illinois Corporation manages Harrah’s Joliet for a fee pursuant to a management agreement. Harrah’s Joliet consists of nearly 40,000 square feet of gaming space, including over 1,100 slot machines and approximately 31 table games.

 

15


The Debtors and certain of their non-Debtor subsidiaries are also partial equity owners of the following non-Debtor entities:

 

    Atlantic City Express Service, LLC (approximately 33.3 percent owned by Debtor Boardwalk Regency Corporation);

 

    Baluma Holdings S.A. (approximately 95.23 percent collectively owned by Debtors Harrah’s International Holding Company, Inc. and B I Gaming Corporation) and Baluma S.A. (approximately 55 percent owned by Baluma Holdings S.A.);

 

    Caesars Casino Castilla La Mancha S.A. (approximately 60 percent owned by non-Debtor subsidiary Caesars Spain Holdings Limited);

 

    Chester Downs and Marina LLC (approximately 99.5 percent owned by Debtor Harrah’s Chester Downs Investment Company, LLC);

 

    Creator Capital Limited (approximately 7.5 percent owned by Debtor Harrah’s Interactive Investment Company);

 

    Emerald Safari Resort (Pty) Limited (approximately 70 percent owned by non-Debtor subsidiary LCI (Overseas) Investments Pty Ltd.);

 

    LAD Hotel Partners, LLC (approximately 49 percent owned by Debtor Harrah’s Bossier City Investment Company, L.L.C.);

 

    Sterling Suffolk Racecourse, LLC (approximately 4.2 percent owned by Debtor Caesars Massachusetts Investment Company, LLC); and

 

    Caesars Enterprise Services, LLC (approximately 69 percent owned by Debtor CEOC).21

 

  3. The Debtors’ International Operations

As of the Petition Date, the Debtors and their non-Debtor subsidiaries own and/or operate various non-U.S. casinos. In Windsor, Ontario, Canada, Debtor CEWL operates Caesars Windsor, a casino owned by the province of Ontario through the Ontario Lottery and Gaming Corporation. One day after the Petition Date, on January 16, 2015, CEWL filed an application under section 46 of Canada’s Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (as amended, the “CCAA”) in the Ontario Superior Court of Justice (the “Canadian Court”), seeking, among other things, recognition of the Chapter 11 Cases as “foreign main proceedings” as such term is defined in section 45 of the CCAA. The Canadian Court granted the relief requested and designated the Chapter 11 Cases as foreign main proceedings on January 19, 2015. As of the date hereof, the CEWL matter remains pending before the Canadian Court.

Additionally, certain of the Debtors’ non-Debtor subsidiaries own leasehold interests in and operate three casinos in London: The Sportsman, The Playboy Club London, and The Casino at the Empire. These casinos primarily draw customers from the London metropolitan area, as well as international visitors. The Debtors also own and operate Alea Nottingham, Alea Glasgow, Manchester235, Rendezvous Brighton, and Rendezvous Southend-on-Sea, each of which are located in the United Kingdom, and primarily draw customers from their respective local areas.

In Egypt, certain of the Debtors’ non-Debtor subsidiaries manage two casinos: The London Club Cairo (which is located at the Ramses Hilton) and Caesars Cairo (which is located at the Four Seasons Cairo). These two casinos primarily draw their customers from countries in the Middle East. Further, one of the Debtors’ non-Debtor subsidiaries maintains a 70 percent ownership interest in and also manages the Emerald Safari casino-resort, which is located in the province of Gauteng in South Africa and primarily draws its customers from South Africa. Lastly, the Debtors and their subsidiaries own approximately 95.23 percent of Baluma Holdings S.A., a non-Debtor entity that in turn owns 55 percent of Conrad Punta del Este Resort and Casino (the “Conrad”). The remaining 45 percent is owned by third-party Enjoy S.A., which is primarily responsible for managing the Conrad.

 

21  CES is discussed in detail in Article II.B.4 below.

 

16


  4. The Total Rewards® Program

One of the Debtors’ key competitive advantages is their industry-leading customer loyalty program, Total Rewards®, which has approximately 45 million members. Total Rewards® participants are able to earn “Reward Credits” by spending money at Caesars properties, which they can later redeem for various on-property amenities, merchandise, gift cards, and travel. Customers can also earn status within the Total Rewards® program based on their level of engagement with the Debtors and certain of their non-Debtor affiliates in a calendar year. Total Rewards® tiers are designated as Gold, Platinum, Diamond, or Seven Stars, and each offers an increasing set of customer benefits and privileges. By structuring the program in tiers with increasing benefits on the amount of the customer’s activity, Caesars’ customers are incentivized to consolidate their entertainment spending at casinos owned or managed by the Debtors and certain of their non-Debtor affiliates.

Additionally, the Debtors maintain a database containing information about their Total Rewards® customers, aspects of their casino gaming play, and their preferred spending choices outside of gaming. The Debtors use this information for marketing promotions, including through direct mail campaigns, the use of electronic mail, their website, mobile devices, social media, and interactive slot machines. Through these marketing promotions, the Debtors are able to generate additional customer play across the properties owned or managed by the Debtors and certain of their non-Debtor affiliates, helping the Debtors capture a growing share of their customers’ entertainment spending.

 

  5. Intellectual Property

The development of intellectual property is part of the Debtors’ overall business strategy, and the Debtors seek to establish and maintain their proprietary rights in their business operations and technology through the use of patents, copyrights, trademarks, and trade secret laws. Although the Debtors’ businesses as a whole are not substantially dependent on any one patent or trademark, the Debtors’ portfolio of intellectual property assets will form the bedrock for the Debtors’ future success. In particular, Debtors Caesars License Company, LLC and Caesars World, Inc. hold multiple trademarks related to the Debtors’ businesses, including Bally’s, Caesars, Caesars Palace, Harveys, Total Rewards, Reward Credits, and Horseshoe.

 

  6. Governmental Regulation

The gaming industry is highly regulated, requiring the Debtors to maintain licenses and pay gaming taxes to continue their operations. Each of the Debtors’ casinos is subject to extensive regulation under the laws, rules, and regulations of the jurisdiction in which it is located. These laws, rules, and regulations generally concern the responsibility, financial stability, and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions.

Besides laws, rules, and regulations relating to gaming, the Debtors’ businesses are also subject to various foreign, federal, state, and local laws and regulations, including restrictions and conditions concerning alcoholic beverages, smoking, environmental matters, employees, currency transactions, taxation, zoning and building codes, construction, land use, and marketing and advertising. Further, because the Debtors deal with significant amounts of cash in the ordinary course of their operations, they are subject to various reporting and anti-money laundering regulations.

 

  B. The Debtors’ Corporate Structure, Parent, and Affiliates

The Debtors’ corporate organization as of the Petition Date is depicted on the chart attached hereto as Exhibit B, which also identifies CEOC’s various Debtor and non-Debtor subsidiaries. As set forth on Exhibit B, CEC owns approximately 89 percent of the outstanding shares of CEOC’s common stock. Certain institutional investors own approximately 5 percent of CEOC’s common stock, and the remaining 6 percent is held by employees who received the stock pursuant to an employee benefit plan that was instituted in May 2014 for CEOC’s directors, officers, and other management-level employees. CEOC, in turn, directly or indirectly wholly- or majority-owns its Debtor subsidiaries.

 

17


In addition to CEOC, CEC owns casino-entertainment properties indirectly through Caesars Entertainment Resort Properties, LLC (“CERP”) and CGP. CERP and CGP are licensed to use Total Rewards®, the industry-leading customer loyalty program to market promotions and generate customer play across the entire network of Caesars properties.

 

  1. Caesars Entertainment Corporation

On January 28, 2008, investment funds affiliated with Apollo Global Management, LLC and TPG Capital, L.P.,22 together with certain co-investors, acquired CEC for approximately $30.7 billion through the 2008 LBO. On February 8, 2012, CEC conducted an initial public offering of its common stock, which now actively trades on the NASDAQ under the ticker symbol “CZR.” Funds affiliated with Apollo or TPG, together with certain co-investors, own or control approximately 60 percent of CEC’s common stock, and thus have voting control of the company. CEC’s remaining common stock is held by institutional and retail investors not affiliated with Apollo or TPG. As of the Petition Date, CEC had a market capitalization of $1.8 billion.

 

  2. Caesars Entertainment Resort Properties, LLC

After the 2008 LBO, CEC operated through two primary groups of wholly owned subsidiaries: (a) CEOC and (b) a group of six subsidiaries financed with real estate loans (the “CMBS Debt”): Harrah’s Atlantic City Holding, LLC; Harrah’s Las Vegas, LLC; Harrah’s Laughlin, LLC; Flamingo Las Vegas Holding, LLC; Paris Las Vegas Holding, LLC; and Rio Properties, LLC (the “CMBS Properties”).

In September 2013, CEC announced that the CMBS Properties would enter into a series of transactions to refinance their outstanding CMBS Debt and reposition them as subsidiaries of CERP, a newly-created direct subsidiary of CEC. As discussed more fully below, the Debtors sold certain properties to CERP in conjunction with this refinancing.

 

  3. Caesars Growth Partners, LLC

CGP is a partnership formed by (a) CAC23 and (b) certain subsidiaries of CEC. CAC purchased approximately 42.4 percent of the economic interest and 100 percent of the voting rights in CGP while CEC, through certain subsidiaries, owns the remaining approximately 57.6 percent economic interest (with no voting rights). CAC acquired its stake in CGP in exchange for $457.8 million in cash while CEC acquired its interest in CGP in exchange for $1.1 billion in face value of Senior Unsecured Notes and all of CEC’s equity in Caesars Interactive Entertainment (“CIE”).

According to CEC, CGP was designed to be a flexible organization that could raise capital necessary to fund Caesars’ more capital-intensive growth projects, such as online gaming and certain properties in need of significant investment. CIE, now a CGP subsidiary, publishes games on social media and mobile applications. CIE also operates real-money online gaming websites in Nevada and New Jersey, offers “play for fun” versions of these websites in other jurisdictions, and owns the World Series of Poker tournament and brand.

 

22  Apollo Global Management, LLC and affiliated funds and management companies are collectively referred to herein as “Apollo”. TPG Capital, L.P. and affiliated funds and management companies are collectively referred to herein as “TPG”. The funds and companies included in these definitions are separate legal entities and the definitions are used here solely for convenience.
23  CAC is a publicly-traded company formed by the Sponsors. CAC was established on October 21, 2013, and initially funded with $457.8 million in cash from the Sponsors. On November 18, 2013, CAC closed a public rights offering, which resulted in another $700 million in funding from both non-Sponsor and Sponsor investment. After this follow-on offering, the Sponsors owned or controlled approximately 51 percent of CAC’s common shares.

 

18


As discussed below, since its formation CGP has purchased several properties and a portion of their associated management fees from CEOC.

 

  4. Caesars Enterprise Services, LLC

CES (sometimes referred to as “ServicesCo”) is a joint venture among CEOC, CERP, and Caesars Growth Properties Holdings, LLC (“CGPH”), an indirect subsidiary of CGP and holding company for the CGP subsidiaries that own Planet Hollywood Resort and Casino, The Cromwell, Horseshoe Baltimore, The LINQ Hotel & Casino in Las Vegas, Bally’s Las Vegas, and Harrah’s New Orleans. Historically, CEOC and its employees managed and funded centralized corporate functions—such as legal, accounting, payroll, information technology, and other enterprise-wide services—for all Caesars properties. As the company expanded since 2008, including with the formation of CAC and CGP (which did not exist when the initial centralized service structure was put in place), CES was formed in 2014, according to CEC, as a centralized “Services Company” to (a) manage centralized assets, such as certain intellectual property and the Total Rewards® loyalty program, (b) employ personnel who provide enterprise-wide services to Caesars branded properties, and (c) ensure an equitable allocation of costs around centralized services, including capital expenditures for shared services and the prioritization of projects.

CERP and CGPH contributed the initial funding needs of CES with $42.5 million and $22.5 million in cash, in exchange for which they received 20.2 percent and 10.8 percent ownership of CES, respectively. CEOC owns the remaining 69 percent of CES. Each of CEOC, CERP, and CGPH has equal 33 percent voting control over CES, rather than in accordance with their ownership stakes. CES’s management and operations are governed by a steering committee, which consists of one member from each of CEOC, CERP, and CGPH. The steering committee can take action by a majority vote (subject to unanimity requirements for certain material actions) or written consent of the steering committee members.

CES provides the Debtors with substantially all of their corporate, regional, and shared (with CERP, CGPH/CGP, or both) employees, as well as substantially all of their property-level employees at the director level or above. As of the Petition Date, the majority of the approximately 2,000 management-level personnel responsible for running the Debtors’ businesses are employed by CES, and CES is responsible for all employment-related obligations associated with these employees, including employment agreements, collective bargaining agreements, and any obligation to bargain and negotiate with a union.

Pursuant to an Omnibus License and Enterprise Services Agreement (the “Omnibus Agreement”), CEOC granted to CES a non-exclusive license to use—but otherwise retained ownership of—certain intellectual property, including Total Rewards®. In turn, CES generally grants to each entity that owns a property a license in and to the intellectual property relevant to such entity’s property.

CES is a cost-allocation center and is therefore not designed to make profit; all services provided for CEOC, CERP, and CGP are provided on a profit-neutral basis. The corporate overhead expenses incurred by CES in performing centralized services, employing personnel, and managing intellectual property are allocated among CEOC, CERP, and CGPH, and generally reimbursed on a weekly basis, with a monthly true-up.24 Allocation percentages are based on a complex allocation methodology that takes into account each entity’s consumption of the specified service or cost.

Prior to the formation of CES, the Debtors also historically managed payroll and accounts payable functions for CEOC, CERP, and CGP and their predecessor entities, with periodic reimbursements from CERP and CGP. The formation of CES has shifted these duties from the Debtors to CES, with CES processing all payroll data for the Debtors and their non-Debtor affiliates, and in substantially all cases acting as a third-party administrator in making payments to the Debtors’ employees and remitting any appropriate deductions on account of payroll taxes or other withholdings to taxing authorities and other third-party benefit providers. CES provides the same services for CERP and CGP.

 

24  From time to time, CES has and may continue to issue capital calls to CEOC, CERP, and CGPH to ensure that CES meets its working capital requirements.

 

19


With respect to accounts payable, CES generally manages and funds all accounts payable on behalf of the Debtors and their non-Debtor affiliates. If and when CES makes a payment for any direct expense on behalf of CEOC, CERP, or CGP, CES is reimbursed on a regular basis (usually within 24–48 hours) for those payments.

Finally, CES functions as the governor on all enterprise-wide investments, including capital expenditures. The CES steering committee must approve all such enterprise-wide capital expenditures and cost allocations relating thereto.

 

  C. Management of the Debtors

 

  1. Board of Directors

CEOC’s board of directors (the “CEOC Board of Directors”) currently consists of six members. Two of the six members are independent directors, as defined in the corporate governance standards of the New York Stock Exchange. On March 18, 2016, Marc Rowan, a co-founder and Senior Managing Director of Apollo Global Management, LLC who had served as a member of the CEOC Board of Directors since June 2014 and as a director at CEC since January 2008, resigned from the CEOC Board of Directors. Set forth below are the directors of the CEOC Board of Directors as of the date of this Disclosure Statement.

 

Name

  

Biography

David Bonderman    Mr. Bonderman became a member of the CEOC Board of Directors in June 2014 and has been a director of CEC since January 2008. Mr. Bonderman is a TPG Founding Partner. Prior to forming TPG in 1993, Mr. Bonderman was Chief Operating Officer of the Robert M. Bass Group, Inc. (now doing business as Keystone Group, L.P.) in Fort Worth, Texas. He holds a bachelor’s degree from the University of Washington and a law degree from Harvard University. He has previously served on the boards of directors of Gemalto N.V., Burger King Holdings, Inc., Washington Mutual, Inc., IASIS Healthcare LLC, and Univision Communications and Armstrong World Industries, Inc. Mr. Bonderman also currently serves on the boards of directors of JSC VTB Bank, Energy Future Holdings Corp., General Motors Company, CoStar Group, Inc., and Ryanair Holdings PLC, of which he is Chairman.
Kelvin Davis    Mr. Davis became a member of the CEOC Board of Directors in June 2014 and has been a director of CEC since January 2008. Mr. Davis is a TPG Senior Partner and Head of TPG’s North American Buyouts Group, incorporating investments in all non-technology industry sectors. He also leads TPG’s Real Estate investing activities. Prior to joining TPG in 2000, Mr. Davis was President and Chief Operating Officer of Colony Capital, Inc., a private international real estate-related investment firm which he co-founded in 1991. He holds a bachelor’s degree from Stanford University and an M.B.A. from Harvard University. Mr. Davis currently serves on the boards of directors of AV Homes, Inc., Northwest Investments, LLC (which is an affiliate of ST Residential), Parkway Properties, Inc., Taylor Morrison Home Corporation, Univision Communications, Inc., and Catellus Development Corporation. He is a member of the Executive Committee and Human Resources Committee.

 

20


Name

  

Biography

Gary Loveman    Mr. Loveman is Chairman of the CEOC Board of Directors, and has also been the Chairman of the Board of CEC since January 1, 2005. Until recently, Mr. Loveman was Chief Executive Officer of Caesars Entertainment, a position he had held since January 2003, and was formerly President of Caesars Entertainment since April 2001. He has over 15 years of experience in retail marketing and service management, and he previously served as an associate professor at the Harvard University Graduate School of Business. He holds a bachelor’s degree from Wesleyan University and a Ph.D. in Economics from the Massachusetts Institute of Technology. Mr. Loveman also serves as a director of Coach, Inc. and FedEx Corporation.
David Sambur    Mr. Sambur became a member of the CEOC Board of Directors in June 2014 and has been a director of CEC since November 2010. Mr. Sambur is a Partner of Apollo Global Management, having joined in 2004. Mr. Sambur has experience in financing, analyzing, investing in, and/or advising public and private companies and their boards of directors. Prior to joining Apollo, Mr. Sambur was a member of the Leveraged Finance Group of Salomon Smith Barney Inc. Mr. Sambur serves on the board of directors of Verso Paper Corp., CEC, CAC, Momentive Performance Materials Holdings, Momentive Specialty Chemical, Inc., and AP Gaming Holdco, Inc. Mr. Sambur graduated summa cum laude and Phi Beta Kappa from Emory University with a BA in Economics. Mr. Sambur is a member of CEOC’s Restructuring Committee.
Ronen Stauber    Mr. Stauber became a member of the CEOC Board of Directors in June 2014 and serves as a member of the Special Governance Committee and the Restructuring Committee. He leads the day-to-day activities of Jenro Capital, which provides transaction and consulting services to corporations, private equity firms, and family investment offices. Prior to Jenro, Mr. Stauber was Head of Private Equity at Berggruen Holdings Ltd., an over $2 billion net asset private investment firm, where he managed over nineteen portfolio companies in the United States and Europe as well as real estate development assets in India, Turkey, and Israel. The portfolio companies were in various industries, including for-profit education, print finishing, furniture, building materials, and car rentals. From 2006 to 2009, Mr. Stauber was an Operating Partner at Pegasus Capital Advisors where he led or participated in over 30 deal teams across a variety of industries and deal sizes. Mr. Stauber was responsible for Pegasus Capital Advisors’ investment in ImageSat International, an international satellite-imagery company, where he also served as a board member. From 1997 to 2006, he was an executive with Cendant Corporation. While at Cendant, Mr. Stauber served as president and Chief Executive Officer of Cendant Corporation’s Consumer Travel, International Markets business unit, as well as Chief Operating Officer of Gullivers Travel Associates. Mr. Stauber previously led Cendant’s strategic development efforts.

 

21


Name

  

Biography

Steven Winograd    Mr. Winograd became a member of the CEOC Board of Directors in June 2014 and serves as a member of the Special Governance Committee and the Restructuring Committee. Since September 2015, Mr. Winograd has been a Managing Director of PennantPark Investment Advisers, a direct lender to, and co-investor in, middle market companies which are, in many cases, affiliated with private equity firms. PennantPark provides financing and invests across a company’s entire capital structure, including senior and junior debt, preferred stock and common equity co-investments. Mr. Winograd’s responsibilities at PennantPark include originating, structuring and managing new investments, assisting with the firm’s fund raising efforts, and working to broaden and deepen its relationships and visibility with private equity firms, intermediaries, and management teams. Prior to joining PennantPark, since August 2011, he had been a managing director in the Financial Sponsors Group of the Investment & Corporate Banking division of BMO Capital Markets, where he was responsible for managing relationships with a number of large-cap and mid-cap private equity clients and their portfolio companies. Prior to joining BMO Capital Markets, from 2004 through 2011, Mr. Winograd was a Managing Director in the Financial Sponsors Group of Merrill Lynch, which was acquired by Bank of America in 2009. Prior to joining Merrill Lynch, Mr. Winograd held senior level positions at a number of other investment banking firms including Deutsche Bank, Bear Sterns, and Drexel Burnham. Mr. Winograd also spent two years as a General Partner of The Blackstone Group where he was involved in investing the firm’s private equity fund, as well as two years as a Managing Director of the Argosy Group, a restructuring advisory firm. During over 33 years as an investment banker, Mr. Winograd has completed numerous transactions for a wide variety of public and private companies including mergers and acquisitions, debt and equity financings, and restructurings. Mr. Winograd also serves as a disinterested Authorized Representative (the functional equivalent of an Independent Director) of Linn Acquisition Company LLC, a wholly owned subsidiary of Linn Energy, LLC, where he manages Linn Acquisition’s direct subsidiary Berry Petroleum Company, LLC, which along with Linn Energy, is one of the top 20 independent oil and gas exploration and production companies in the United States. Mr. Winograd received a BA from Wesleyan University and an MBA from the Columbia University Graduate School of Business, where he was elected to the Beta Gamma Sigma Honor Society.

 

  2. Executive Officers

Set forth below are the senior executive officers of CEOC as of the date of this Disclosure Statement and each officer’s position within CEOC.

 

Name

  

Biography

John Payne    Mr. Payne is President and Chief Executive Officer of CEOC. Mr. Payne joined CEC nearly 19 years ago as a President’s Associate. Most recently, he served as President, Central Markets & Partnership Development for Caesars Entertainment. Prior to this role, Mr. Payne was President of Enterprise Shared Services from July 2011 to May 2013. Previously, he was Central Division President. Mr. Payne has held general manager roles of several properties, including Harrah’s New Orleans.

 

22


Name

  

Biography

Mary Elizabeth Higgins    Ms. Higgins is Chief Financial Officer of CEOC. Ms. Higgins joined CEOC from Global Cash Access Inc., where she served as Chief Financial Officer and Executive Vice President from September 2010 to March 2014 and was responsible for all facets of financial management, including financial controls and reporting, taxation, financial planning, treasury, and investor relations. Prior to this, Ms. Higgins held the Chief Financial Officer role at Herbst Gaming Inc. and Camco Inc., successively. She holds a bachelor’s degree in international relations from the University of Southern California and an MBA in finance from Memphis State University.
Timothy Lambert    Mr. Lambert is General Counsel of CEOC. Mr. Lambert joined Empress Entertainment, a predecessor of CEC, in 1995. He was most recently Vice President and Chief Counsel Regional Operations, Regulatory & Compliance for Caesars Entertainment, and continues to retain this position after his appointment as General Counsel. Mr. Lambert graduated Cum Laude from Illinois Wesleyan University with a bachelor’s degree in business administration, and received his law degree from the University of Illinois College of Law, where he graduated Magna Cum Laude.
Randall S. Eisenberg    Mr. Eisenberg is Chief Restructuring Officer of CEOC. He is also a Managing Director at AlixPartners. Mr. Eisenberg has over 25 years of experience advising senior management, boards of directors, equity sponsors, and credit constituents in the transformation and restructuring of underperforming companies. Although many of his matters remain confidential, Mr. Eisenberg has been involved with some of the largest and most complex restructurings in the recent past, including Anthracite Capital, Inc., Delphi Corporation, Jackson Hewitt, Kmart Corporation, Momentive Performance Materials, Inc., Planet Hollywood International, Inc., Rotech Healthcare, Inc., RSL Communications, Ltd., Select Staffing, US Airways Group, Inc., Vertis, Inc., and Visteon Corp. Mr. Eisenberg is a fellow in both the American College of Bankruptcy and International Insolvency Institute, and is a past Chairman, President, and Board Member of the Turnaround Management Association.

 

  3. The Special Governance Committee

On June 27, 2014, the Debtors appointed Steven Winograd and Ronen Stauber (both listed above) as independent directors of CEOC. Messrs. Winograd and Stauber then formed the Special Governance Committee on July 30, 2014. As described in greater detail in Article IV.D below, the Special Governance Committee was charged with, among other things, conducting an independent investigation into potential claims that the Debtors and/or their creditors may have against CEC or its affiliates, including claims that eventually formed the bases of filed creditor complaints. Various creditors including the Second Priority Noteholders Committee believe this investigation is tainted as further described below in Article IV.F; the Debtors strongly disagree. Further, since its formation, the Special Governance Committee has been actively monitoring restructuring negotiations with creditors and has engaged in its own negotiations with CEC to secure substantial contributions by CEC to the restructuring and improved recoveries for all stakeholders.

 

  4. The Restructuring Committee

On January 14, 2015, a Restructuring Committee (the “Restructuring Committee”) of the CEOC Board of Directors was established. The Restructuring Committee is comprised of David Sambur, Steven Winograd, and Ronen Stauber. Randall S. Eisenberg, as CEOC’s Chief Restructuring Officer, reports directly to the Restructuring Committee, and the Restructuring Committee has the power and authority to oversee certain of the Debtors’ restructuring matters and act on behalf of the CEOC Board of Directors with respect to such matters.

 

23


  D. The Debtors’ Capital Structure

As of the Petition Date, the Debtors have outstanding funded debt for borrowed money in the aggregate principal amount of approximately $18 billion. These obligations are discussed in turn below.

 

  1. First Lien Debt

 

  (a) Prepetition Credit Agreement Debt

As of the Petition Date, CEOC owed approximately $5.35 billion under four term loans issued pursuant to the Prepetition Credit Agreement. Under the Prepetition Credit Agreement, CEOC has approximately $106.1 million of capacity under a revolving credit facility, approximately $101.3 million of which was committed to outstanding letters of credit as of the Petition Date. In addition, Prepetition Credit Agreement Claims include the Swap and Hedge Claims, which arose pursuant to certain of CEOC’s interest rate swap agreements that it uses to manage certain variable and fixed interest rates.

CEC guarantees CEOC’s obligations under the Prepetition Credit Agreement pursuant to the terms of that certain Guaranty and Pledge Agreement, dated as of July 25, 2014, made by CEC in favor of Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), in its capacity as successor agent under the Prepetition Credit Agreement, as amended by that certain Amendment dated August 21, 2015 (as the same may be further amended, restated, or supplemented from time to time) (the “Guaranty and Pledge Agreement”).

 

  (b) First Lien Notes

As of the Petition Date, CEOC owed approximately $6.35 billion in principal amount outstanding to holders of the First Lien Notes (the “First Lien Noteholders”) issued by CEOC pursuant to the First Lien Notes Indentures, including the 8.50% First Lien Notes Indenture, the 9.00% First Lien Notes Indentures, and the 11.25% First Lien Notes Indenture (collectively, the “First Lien Notes Indentures”). UMB Bank, N.A. is the indenture trustee for each of the First Lien Notes Indentures (the “First Lien Notes Indenture Trustee” or “UMB”).

 

  (c) First Lien Collateral and Intercreditor Agreements

CEOC’s prepetition obligations under the Prepetition Credit Agreement and the First Lien Notes (collectively the “First Lien Debt”) are secured by first priority liens on the “Collateral,” as defined in that certain Amended and Restated Collateral Agreement (as amended, modified, waived, and/or supplemented from time to time, the “First Lien Collateral Agreement”), dated as of June 10, 2009, by and among CEOC, certain CEOC subsidiaries identified therein (together with CEOC, the “First Lien Pledgors”), and the collateral agent under the Prepetition Credit Agreement (the “First Lien Collateral Agent”).25

Pursuant to the First Lien Collateral Agreement, the First Lien Pledgors pledged substantially all of their assets—including, among other things, commercial tort claims and cash—to secure the First Lien Debt. Specifically, section 4.04(b) of the First Lien Collateral Agreement requires the First Lien Pledgors to (a) promptly notify the First Lien Collateral Agent if the First Lien Pledgors at any time hold or acquire any commercial tort claim that the First Lien Pledgors reasonably estimate to be in an amount greater than $15 million and (b) grant to the First Lien Collateral Agent a security interest in such commercial tort claim and in the proceeds thereof.26 On September 25, 2014, in compliance with their obligations under the First Lien Collateral Agreement, the First Lien Pledgors granted to the First Lien Collateral Agent, for the benefit of creditors under the Prepetition Credit Agreement (“First Lien Lenders”) and the First Lien Noteholders (together with the First Lien Lenders, the “First Lien Creditors”), an interest in and lien on all of the First Lien Pledgors’ rights, title, and interests in certain commercial tort claims (the “Commercial Tort Claims”) and proceeds thereof, to the extent any such claims exist.27

  

 

25  Bank of America, N.A. was the original administrative agent and collateral agent under the Prepetition Credit Agreement and was replaced in such capacities by Credit Suisse on July 25, 2014
26  Generally, a categorical description is insufficient to grant a security interest in commercial tort claims. See U.C.C. §§ 9-108(e)(1); 9-204(b)(2).
27  As described further in Article IV.N and Article IV.O below, the Unsecured Creditors Committee and the Subsidiary-Guaranteed Notes Trustee (as defined herein) have filed motions seeking standing to pursue challenges to certain of the First Lien Creditors’ liens. The Bankruptcy Court has continued that standing request. See [Docket Nos. 3403, 3404]. Pursuant to the UCC RSA and the SGN RSA, the Debtors expect that the Unsecured Creditors Committee and the Subsidiary-Guaranteed Notes Trustee will keep each of their respective motions for standing in abeyance through the Confirmation Hearing.

 

24


The First Lien Agents,28 and other parties from time to time, entered into that certain First Lien Intercreditor Agreement, dated as of June 10, 2009 (as amended, restated, modified, and supplemented from time to time, the “First Lien Intercreditor Agreement”), which was consented to by CEOC and CEC and governs, among other things: (i) payment and priority with respect to holders of claims related to the First Lien Debt; (ii) rights and remedies of First Lien Creditors with respect to debtor-in-possession financing, use of cash collateral, and adequate protection in a chapter 11 case; and (iii) the relative priority of liens granted to holders of “First Lien Obligations” (as defined in the First Lien Intercreditor Agreement).

 

  2. Second Lien Debt

 

  (a) Second Lien Notes

As of the Petition Date, CEOC owed approximately $5.24 billion in principal amount outstanding to holders of Second-Priority Senior Secured Notes (the “Second Lien Notes”) issued pursuant to the Second Lien Notes Indentures, including the 10.00% Second Lien Notes Indentures and the 12.75% Second Lien Notes Indentures.

 

  (b) Second Lien Collateral and Intercreditor Agreements

CEOC’s prepetition obligations under the Second Lien Notes (the “Second Lien Debt”) are secured by second priority liens in the “Collateral,” as defined in and subject to the terms of that certain Collateral Agreement (as amended, restated, modified, and supplemented from time to time, the “Second Lien Collateral Agreement” and together with the First Lien Collateral Agreement, the “Collateral Agreements”), dated as of December 24, 2008, by and among CEOC, certain CEOC subsidiaries identified therein (together with CEOC, the “Second Lien Pledgors”), and the Second Lien Agent,29 in its capacity as collateral agent (the “Second Lien Agent” and collectively with the First Lien Collateral Agent, the “Collateral Agents”). Section 4.01 of the Second Lien Collateral Agreement expressly excludes cash and deposit accounts from the collateral package securing the Second Lien Debt.30

Section 4.04(b) of the Second Lien Collateral Agreement requires the Second Lien Pledgors to (i) promptly notify the Second Lien Collateral Agent if the Second Lien Pledgors at any time hold or acquire any commercial tort claim the Second Lien Pledgors reasonably estimate to be in an amount greater than $15 million and (ii) grant to the Second Lien Collateral Agent, for the benefit of owners of the Second Lien Notes (the “Second Lien Noteholders”) a security interest in such commercial tort claim and in the proceeds thereof. On November 25, 2014, in compliance with the Second Lien Collateral Agreement, the Second Lien Pledgors granted to the Second Lien Collateral Agent a security interest in and lien on all of the Second Lien Pledgors’ rights, title, and interests in and to the Commercial Tort Claims and proceeds thereof, to the extent any such claims exist.31

 

28  As used herein, “First Lien Agents” means, collectively, the First Lien Collateral Agent and the First Lien Notes Indenture Trustee, including any predecessor in such capacity as applicable.
29  As used herein, “Second Lien Agent” means U.S. Bank National Association (“U.S. Bank”) in its capacity as indenture trustee under the Second Lien Notes Indentures and collateral agent under the Second Lien Collateral Agreement, and any successors in such capacities, including Delaware Trust Company.
30  See Second Lien Collateral Agreement § 4.01 (“Notwithstanding anything to the contrary in this Agreement, this Agreement shall not constitute a grant of a security interest in . . . cash, deposit accounts and securities accounts (to the extent that a Lien thereon must be perfected by an action other than the filing of customary financing statements).” Because perfection of a lien on cash or deposit accounts requires control or possession, the Second Lien Collateral Agreement does not provide Second Lien Noteholders with a security interest therein.
31  As described further in Article IV.N and Article IV.O below, the Unsecured Creditors Committee and the Subsidiary-Guaranteed Notes Trustee have filed motions seeking standing to pursue challenges to certain of the Second Lien Noteholders’ liens. The Bankruptcy Court has continued that standing request. See [Docket Nos. 3403, 3404]. Pursuant to the UCC RSA and the SGN RSA, the Debtors expect that the Unsecured Creditors Committee and the Subsidiary-Guaranteed Notes Trustee will keep each of their respective motions for standing in abeyance through the Confirmation Hearing.

 

25


The First Lien Agents and the Second Lien Agent entered into that certain Intercreditor Agreement, dated as of December 24, 2008 (as amended, restated, modified, and supplemented from time to time, the “Second Lien Intercreditor Agreement”), which was acknowledged by CEOC. The Second Lien Intercreditor Agreement governs, among other things, the relative priority of the First Lien Debt and the Second Lien Debt and the rights and remedies of First Lien Creditors and Second Lien Noteholders with respect to debtor-in-possession financing, use of cash collateral, and adequate protection.

 

  3. Subsidiary-Guaranteed Debt

 

  (a) Subsidiary-Guaranteed Notes

As of the Petition Date, CEOC owed approximately $479 million in principal amount outstanding to holders of Subsidiary-Guaranteed Notes issued pursuant to the Subsidiary-Guaranteed Notes Indenture. CEOC’s prepetition obligations under the Subsidiary-Guaranteed Notes were guaranteed by the Subsidiary Guarantors—a group comprised of certain of CEOC’s direct and indirect subsidiaries, all or substantially all of which pledged assets to the First Lien Collateral Agent to secure the First Lien Debt.

 

  (b) Subsidiary-Guaranteed Notes Intercreditor Agreement

The First Lien Collateral Agent (in its capacity as such and also as administrative agent) and the Subsidiary-Guaranteed Notes Indenture Trustee, among others, entered into that certain Intercreditor Agreement, dated as of January 28, 2008 (the “Subsidiary-Guaranteed Notes Intercreditor Agreement”). The Subsidiary-Guaranteed Notes Intercreditor Agreement includes, among other things, a provision requiring the Holders of Subsidiary-Guaranteed Notes to turnover a portion of the payments made to them by any Subsidiary Guarantor (but not from CEOC) prior to the indefeasible payment in full in cash of certain first lien obligations. As addressed in greater detail in Article IV.J.3 and Note 14 of the Debtors’ Liquidation Analysis attached hereto as Exhibit D, a dispute exists among the Debtors and certain of their stakeholders, including, among others, Holders of Subsidiary-Guaranteed Notes Claims, Holders of Prepetition Credit Agreement Claims, and Holders of Secured First Lien Notes Claims concerning the potential application of these provisions, and the Subsidiary Guaranteed Notes Indenture Trustee has disputed, among other things, whether the Holders of First Lien Notes Claims may benefit from the turnover provision therein.

 

  4. Senior Unsecured Notes

As of the Petition Date, CEOC owed approximately $530 million in principal amount outstanding to holders of Senior Unsecured Notes issued pursuant to the Senior Unsecured Notes Indentures, including the 5.75% Senior Unsecured Notes Indenture and the 6.50% Senior Unsecured Notes Indenture. Certain affiliates of CAC are holders of Senior Unsecured Notes representing approximately $289 million in principal amount. As set forth in Article IV.D.8, Holders of approximately $82.4 million of Senior Unsecured Notes entered into a purchase and support agreement with CEOC and CEC in August 2014, pursuant to which they agreed to be deemed to consent to any restructuring of the Senior Unsecured Notes (including the Amended Senior Unsecured Notes, as defined herein) that has been consented to by holders of at least 10 percent of the outstanding 6.50% Senior Unsecured Notes Due 2016 and 5.75% Senior Unsecured Notes Due 2015, as applicable. Approximately $159 million in principal amount of Senior Unsecured Notes remains outstanding that is not owned by CAC or the August Noteholders (as defined herein).

 

26


ARTICLE III.

EVENTS LEADING TO THE CHAPTER 11 FILINGS

The Debtors and their non-Debtor affiliates operate one of the largest and most comprehensive portfolios of casino properties in North America. The Debtors’ combination of both local and destination options for gaming and entertainment offers many patrons a unique opportunity to enjoy a high-quality gaming experience not only on vacation, but throughout the year. Unlike competitors that offer only regional gaming properties, the Debtors have been able to obtain higher than average spending at their regional properties because their industry-leading customer loyalty program, Total Rewards®, provides customers with entertainment and gaming rewards that can be used in Las Vegas and other destinations. And unlike competitors that offer only destination properties, the Debtors’ more frequent interactions with their customers at the local level allows them to fashion personally tailored reward packages that enhance their customers’ experiences and encourage trips to destinations such as Las Vegas. This symbiotic relationship between the Debtors’ properties promotes higher customer traffic and spending throughout the enterprise, including both regional and destination properties.

 

  A. Economic Challenges

 

  1. The 2008 Recession

The 2008 recession had a significant impact on the Debtors, with enterprise-wide net revenues before promotional allowances falling from $12.7 billion in 2007 to $10.3 billion in 2009. In response to the 2008 recession, the Debtors eliminated hundreds of millions of dollars of corporate, marketing, and operational costs. Despite these efforts, CEC’s adjusted EBITDA dropped from $2.1 billion in 2007 to $1.7 billion in 2009, and continued to decline through the Petition Date.32

 

  2. Changing Consumer Spending Habits

The challenges facing the Debtors were not limited to the 2008 recession. Even though the economy has improved, the Debtors are now facing changing consumer preferences. For example, the “Millennial” generation has shown less interest in gaming than previous generations. Thus, although Las Vegas’s tourist numbers have largely rebounded to pre-recession rates, visitors, on average, are younger and less willing to gamble. According to the Las Vegas Convention and Visitors Bureau, 47 percent of Las Vegas visitors in 2012 indicated that their primary reasons to visit was for vacation or pleasure instead of gambling, which is up from 39 percent in 2008.33 To address this changing dynamic and capture this younger crowd, many of the newest gaming properties provide significant non-gaming entertainment options. The Debtors likewise are pursuing younger customers, including by renovating Caesars Palace’s nightclub to drive additional traffic to that property. But nightlife, restaurants, and other entertainment options are not as profitable as gaming.

 

  3. Increased Competition

The Debtors also face increased competition for gaming dollars. Since 2001, nine states have legalized gambling (bringing the total to 18), which has resulted in more local casinos.34 In Ohio, for example, the first casino opened in 2012—now there are eleven. Similarly, over the past five years, Pennsylvania, which had almost no gaming at the time the 2008 LBO was signed, has become the second-largest domestic gaming market outside of Nevada.35 These additional gaming options have added pressure to existing casinos as the total customer population has remained relatively stable.36

 

 

32  After the Petition Date and during the Chapter 11 Cases, the Debtors’ business operations have consistently provided strong cash flow. SeeArticle IV.Y
33  Las Vegas Convention & Visitors Auth., 2012 Las Vegas Visitor Profile [Page 17] (2012), available at http://www.lvcva.com/includes/content/images/MEDIA/docs/2012-Las_Vegas_Visitor_Profile1.pdf.
34  Ryan McCarthy, The End of a Casino Monopoly, in Three Charts, Washington Post (Sept. 23, 2014), http://www.washingtonpost.com/news/storyline/wp/2014/09/23/the-end-of-a-casino-monopoly-in-three-charts/; Matt Villano, All In: Gambling Options Proliferate Across USA, USA Today (Jan. 26, 2013), http://www.usatoday.com/ story/travel/destinations/2013/01/24/gambling-options-casinos-proliferate-across-usa/1861835.
35  IBISWorld: Safe Bet: A rise in tourism and personal expenditure will boost demand for casinos, IBISWorld Industry Report 71321: Non-Casino Hotels in the US, 8 (November 2014).
36  Josh Barro, The Strange Case of States’ Penchant for Casinos, N.Y. Times (Nov. 5, 2014), http://www.nytimes.com/2014/11/06/upshot/the-strange-case-of-states-addiction-to-casinos.html?abt=0002&abg=1(“States have gradually expanded legal gambling over the last four decades as a way to generate revenue without unpopular tax increases. But large parts of the American market are now saturated, with revenue in decline in most major casino markets. A majority of Americans already live relatively near casinos, so opening new ones does more to shift revenue around than to generate new business. As supply has outpaced demand, some casinos are closing, and governments have missed their projections for gambling-related revenue.”).

 

27


Even in Las Vegas, new developments have increased competition for existing casinos. Since 2008, three new developments have opened on the Las Vegas Strip: (a) in December 2008, Wynn Resorts Limited opened the $2.3 billion Encore Las Vegas, which includes more than 2,000 hotel rooms, approximately 76,000 square feet of gaming space, and approximately 27,000 square feet of retail and entertainment space; (b) in December 2009, MGM Resorts International opened up CityCenter, a $9.2 billion gaming and residential resort that includes more than 6,000 hotel rooms, approximately 150,000 square feet of gaming space, and 500,000 square feet of retail and restaurant space; and (c) in December 2010, the Cosmopolitan Las Vegas, a $3.9 billion gaming resort, opened, adding approximately 3,000 hotel rooms, 110,000 square feet of gaming space, and 300,000 square feet of retail and restaurant space. These developments, as well as newly renovated properties by many of Las Vegas’s traditional operators, have increased the supply of gaming, hotel, restaurant, and shopping opportunities available to Las Vegas visitors, leading to top-line revenue pressures for Caesars Palace.

 

  4. Challenges in the Atlantic City Market

The Debtors also face significant challenges in the Atlantic City market, where they own Caesars Atlantic City and Bally’s Atlantic City. These challenges are the result of, among other things, the effects of Hurricanes Irene and Sandy on the local economy, an oversaturated local market, and increased competition from casinos on the East Coast. As the chair of the New Jersey Casino Control Commission noted in the opening to that body’s 2010 annual report:

Over the years, Atlantic City’s gaming industry has gone from enjoying a monopoly in the eastern half of the United States to a fiercely competitive situation today with slot machines or full blown casinos in every neighboring state. Gamblers in the New York, Philadelphia and Baltimore metropolitan areas now have places a lot closer to home than Atlantic City is. The so-called “convenience gambler” has found more convenient places to go to gamble. Similarly, development of casino hotels in Macau and Singapore, as well as the new properties in Las Vegas, has made it harder for Atlantic City to attract the real high-end players.37

As a result, Atlantic City has seen several high-profile casino bankruptcies in recent years.38 Four Atlantic City casinos closed in 2014 alone,39 including the Debtors’ Showboat Atlantic City property. According to the Atlantic City Gaming Industry Report, prepared by the Office of Communications, State of New Jersey Casino Control Commission, gaming revenues for Atlantic City properties have declined more than 40 percent since the 2008 LBO, from $5.2 billion in 2006 to $2.7 billion in 2014.

 

37  State of New Jersey Casino Control Comm’n, 2010 Annual Report (2010), available at http://www.state.nj.us/casinos/reports.
38  See, e.g., In re Trump Entertainment Resorts, Inc., No. 14-12103 (KG) (Bankr. D. Del.); In re Revel AC, Inc., No. 14-22654 (GMB) (Bankr. D.N.J.); In re Revel AC, Inc., No. 13-16253 (JHW) (Bankr. D.N.J.).
39 

Mark Berman, Trump Plaza Closes, Making It Official: A Third of Atlantic City’s Casinos Have Closed This Year, Wash. Post (Sept. 16, 2014), http://www.washingtonpost.com/news/post-nation/wp/2014/09/16/trump-plaza-closes-making-it-official-a-third-of-atlantic-citys-casinos-have-closed-this-year.

 

28


  B. Certain Prepetition Challenged Transactions

Prior to the Petition Date, the Debtors were involved in numerous asset sales, capital market transactions, and other transactions. Certain of these transactions were with affiliates (collectively, the “Challenged Transactions”), including (i) the CIE Transactions, (ii) the 2010 Trademark Transfer, (iii) the CERP Transaction, (iv) the Growth Transaction, (v) the Four Properties Transaction, (vi) the Shared Services Joint Venture, (vii) the B-7 Refinancing, (viii) repayment of an intercompany revolver, and (iv) the August Notes Transaction (each as defined below, as applicable). As discussed more fully in Article IV.D and Article IV.E below, the Challenged Transactions have been the subject of investigation by the Special Governance Committee and the Bankruptcy Court-appointed Examiner. In addition, the Challenged Transactions have been the subject of numerous creditor group lawsuits as discussed more fully in Article III.D below.

 

  C. Recent and Impending Property Closures

The Debtors have considered other options to reduce overhead and improve cash flows. In particular, the Debtors conducted a comprehensive review of their property portfolio to identify their weakest performing casino properties, especially those in markets that are oversupplied with gaming options. As a result of this review, the Debtors closed two U.S. properties in 2014: Harrah’s Tunica, which was closed on June 2, 2014, and Showboat Atlantic City, which was closed on August 31, 2014. Subsequently, the Debtors sold the Showboat Atlantic City property to a New Jersey public university in a transaction that closed on December 12, 2014. As described more fully herein at Article IV.U, the Debtors sold the Harrah’s Tunica property during the Chapter 11 Cases. In addition, the Debtors ceased their greyhound racing activities at the Horseshoe Council Bluffs casino in Council Bluffs, Iowa, effective December 31, 2015, in response to local legislation. The Horseshoe Council Bluffs casino otherwise remains open for business.

 

  D. Litigation Regarding Challenged Transactions and CEC’s Guarantees

The Challenged Transactions are the subject of serious and complicated disputes between CEOC, various of its creditors, and CEC and its affiliates. Generally speaking, the creditors claim that the Challenged Transactions were unlawful and/or violated certain covenants under the applicable indentures. More specifically, the Debtors’ various noteholder groups allege that assets were transferred at below-market prices as part of a scheme by CEC and the Sponsors to transfer valuable assets from CEOC to CEC and its affiliates to remove them from the reach of CEOC’s creditors. The creditors further allege that CEOC’s directors and officers are unavoidably conflicted due to their extensive business and commercial ties to CEC and the Sponsors, and that they violated their fiduciary duties by approving the transactions. Each of these claims and allegations are subject to vigorous dispute by the defendants in such actions. The Special Governance Committee’s investigation into these claims is discussed more fully in Article IV.D below. Similarly, the Examiner’s Report on the Challenged Transactions is discussed in Article IV.E below.

On August 4, 2014, Wilmington Savings Fund Society, FSB, solely in its capacity as indenture trustee under the 10.00% Second Lien Notes Indenture dated as of April 15, 2009 (“WSFS”), commenced an action in the Court of Chancery of the State of Delaware against, among others, CEC, CEOC, CGP, CERP, CEC’s directors, and certain of CEOC’s directors in a case captioned Wilmington Savings Fund Society, FSB v. Caesars Entertainment Corporation, C.A. No. 10004-VCG (the “WSFS Delaware Action”). In the WSFS Delaware Action, WSFS alleged claims for, among other things, intentional and constructive fraudulent transfer, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, corporate waste, and breach of contract. On August 3, 2015, WSFS amended its complaint to assert certain claims under the Trust Indenture Act of 1939 (the “TIA”) against CEC related to the release of CEC’s guarantee of the amounts outstanding under the 10.00% Second Lien Notes Indenture [Del. Ch. Court Docket ID. 74742841]. The claims in the WSFS Delaware Action are focused on the CIE, CERP, Growth, and Four Properties Transactions, as well as the Shared Services Joint Venture. During the pendency of the Chapter 11 Cases, the action has been automatically stayed with respect to the Debtors as well as derivative claims that belong to the Estates against CEC, CGP, CERP, CEC’s directors, and certain of CEOC’s directors. Vice Chancellor Glasscock denied a motion to dismiss with respect to CEC on March 18, 2015. Plaintiffs have advised

 

29


the Bankruptcy Court that they agreed their derivative claims are automatically stayed and therefore are only pursuing their independent breach of contract and TIA claims, alleging that CEC remains liable under the parent guarantee formerly applicable to 10.00% Second-Priority Notes due 2018. On March 14, 2016, WSFS moved for partial summary judgment, asking the court to determine that WSFS is entitled to its $3.6 billion claim because the relevant section of the indenture is unambiguous and an event of default occurred [Del. Ch. Court Docket ID. 76344683]. On April 25, 2016, CEC submitted a cross-motion for partial summary judgment in response. As of the date hereof, briefing on these summary judgment motions is complete. In addition, as described below in Article IV.S.1, an injunction staying the commencement of trials in the BOKF SDNY Action (as defined below) expired on May 9, 2016. On June 6, 2016, the Debtors filed an emergency motion seeking a temporary restraining order and preliminary injunction enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits because the Debtors believe such an injunction is necessary to protect the Debtors’ ability to reorganize in the Chapter 11 Cases [Adv. Case. No. 15-00149 (ABG), Docket No. 241]. After an evidentiary hearing held on June 8, 9, and 13, the Bankruptcy Court granted the Debtors’ motion on June 15, 2016, enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits until August 29, 2016.

On August 5, 2014, CEC and CEOC commenced a lawsuit in the Supreme Court of New York, County of New York, against certain institutional holders of First and Second Lien Notes, which is captioned Caesars Entertainment Operating Company, Inc. and Caesars Entertainment Corporation v. Appaloosa Investment Limited Partnership I, et al., Index No. 652392/2014 (the “New York State Action”). The members of the Special Governance Committee abstained from the decision to file the New York State Action. In the New York State Action, CEC and CEOC asserted that the defendants tortiously interfered with CEC’s and CEOC’s businesses in an attempt to improve defendants’ credit default swap and other securities positions. CEC and CEOC also sought declarations that no defaults occurred under CEOC’s First and Second Lien Notes Indentures and that there have been no breaches of fiduciary duty or fraudulent transfers. Defendants filed motions to dismiss this action in October 2014. On June 29, 2015, the court dismissed the complaint without prejudice, reserving its decision on Count I of the complaint pending a motion by the defendants [Docket No. 155]. On July 20, 2015, the court dismissed Count I of the claim with prejudice [Docket No. 160], so the entire complaint is now dismissed. On June 23, 2016, certain Holders of Second Lien Notes and WSFS brought suit against CEC on account of the New York State Action asserting, among other things, causes of action for malicious prosecution, abuse of process, and recovery of costs and attorney’s fees incurred in connection with the New York State Action.

On November 25, 2014, the First Lien Notes Indenture Trustee, in its capacity as trustee under the 8.50% First Lien Notes Indenture, commenced an action in the Court of Chancery of the State of Delaware against CEC, CEOC, CGP, CERP, CEC’s directors, and all of CEOC’s directors in a case captioned UMB Bank v. Caesars Entertainment Corporation, C.A. No. 10393-VCG (the “UMB Receiver Action”). In the UMB Receiver Action, the First Lien Notes Indenture Trustee has alleged that CEC engaged in a fraudulent scheme to strip assets from CEOC, and seeks, among other things, to have the Delaware Chancery Court appoint a receiver to manage CEOC’s affairs for the benefit of its noteholders. Pursuant to the Prepetition RSA, the UMB Receiver Action was consensually stayed as to all defendants upon the filing of the Chapter 11 Cases.

On September 3 and October 2, 2014, certain Senior Unsecured Noteholders commenced two actions against CEC and CEOC in the United States District Court for the Southern District of New York, which are captioned MeehanCombs Global Credit Opportunities Master Fund, LP v. Caesars Entertainment Corp. and Caesars Entertainment Operating Co., Inc., Case No. 14-cv-07091-SAS (the “MeehanCombs SDNY Action”), and Danner v. Caesars Entertainment Corp. and Caesars Entertainment Operating Co., Inc., Case No. 14-cv-07973-SAS (the “Danner SDNY Action,” and together with the MeehanCombs SDNY Action the “Unsecured Noteholder SDNY Actions”).40 Through the Unsecured Noteholder SDNY Actions, these Senior Unsecured Noteholders have asserted that the Senior Unsecured Notes Transaction breached the Senior Unsecured Notes Indentures, violated the TIA, and breached the covenant of good faith and fair dealing. The Unsecured Noteholder SDNY Actions were stayed with respect to CEOC as a result of the automatic stay, but continue to proceed with respect to CEC. On January 15, 2015, CEC’s motion to dismiss in the Danner SDNY Action was denied in its entirety and CEC’s motion to dismiss in the MeehanCombs SDNY Action was granted in part and denied in part. See MeehanCombs Global

 

40 

On March 18, 2016, MeehanCombs Global Credit Opportunities Master Fund, LP withdrew from the MeehanCombs SDNY Action. The other plaintiffs in the MeehanCombs SDNY Action continue to pursue their asserted claims.

 

30


Credit Opportunities Master Funds, LP v. Caesars Entm’t Corp., 80 F. Supp. 3d 507 (S.D.N.Y. 2015). The plaintiffs in the MeehanCombs SDNY Action filed an amended complaint on January 29, 2015, which, among other changes, added a cause of action against CEC for breaches of contract and guarantees relating to the Debtors’ bankruptcy filings. The plaintiff in the Danner SDNY Action filed an amended complaint on February 19, 2015. On October 23, 2015, the Unsecured Noteholders SDNY Action plaintiffs moved for partial summary judgment [Docket No. 67 in the MeehanCombs SDNY Action and Docket No. 60 in the Danner SDNY Action] asserting that the Senior Unsecured Notes Transaction in August 2014 was a violation of the TIA as a matter of law. On December 29, 2015, Judge Scheindlin denied the motion for summary judgment because there were open issues of fact related to certain transactions in May 2014 that also may have resulted in the release of CEC’s guaranty of the outstanding obligations under the Senior Unsecured Notes Indentures.41 See MeehanCombs Global Credit Opportunities Master Funds, LP v. Caesars Entm’t Corp., 2015 WL 9478240 (S.D.N.Y. Dec. 29, 2015). On January 13, 2016, the Danner and MeehanCombs plaintiffs filed a letter with the court requesting that the trial be consolidated with the trial in the Secured Noteholder SDNY Actions (as defined below) [Docket No. 90 in the MeehanCombs SDNY Action and Docket No. 89 in the Danner SDNY Action], which at that time was scheduled for March 14, 2016. In response, on January 15, 2016, CEC filed a request that each of the Danner SDNY Action, the MeehanCombs SDNY Action, and the Secured Noteholder SDNY Actions be stayed until the Court of Appeals for the Second Circuit issues its ruling in Marblegate Asset Management, LLC v. Education Management Corp., Nos. 15-2124 and 15-2141 (2d. Cir.), filed on July 2, 2015. On January 16, 2016, Judge Scheindlin denied both the request to consolidate and the request to stay.

In March of 2016, Judge Scheindlin announced her resignation from the bench effective April 28, 2016. The Unsecured Noteholder SDNY Actions, the Secured Noteholder SDNY Actions (as defined below), and the Wilmington Trust SDNY Action (as defined below) (collectively, the “SDNY Actions”) have been reassigned to the Honorable Jed S. Rakoff. At a hearing on April 6, 2016, Judge Rakoff questioned whether, given the close of discovery, there were any disputed issues of material fact that would preclude any of the SDNY Actions from being decided on summary judgment or at a bench trial. The parties to all of the SDNY Actions agreed to a renewed summary judgment schedule to conclude with oral argument on June 24, 2016, with a decision to be delivered no later than July 22, 2016. If a trial is necessary, a “global” trial on all of the SDNY Noteholder Actions was scheduled to begin on August 22, 2016. As noted above and described below in Article IV.S.1, an injunction staying the commencement of trials in the BOKF SDNY Action expired on May 9, 2016. On June 6, 2016, the Debtors filed an emergency motion seeking a temporary restraining order and preliminary injunction enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits because the Debtors believe such an injunction is necessary to protect the Debtors’ ability to reorganize in the Chapter 11 Cases [Adv. Case. No. 15-00149 (ABG), Docket No. 241]. After an evidentiary hearing held on June 8, 9, and 13, the Bankruptcy Court granted the Debtors’ motion on June 15, 2016, enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits until August 29, 2016. The Southern District of New York has scheduled oral argument in the SDNY Actions for August 30, 2016. The Debtors reserve their rights with respect to further injunctions.

Three additional proceedings have been commenced against CEC subsequent to the Petition Date. Specifically, on March 3, 2015, BOKF, N.A. (“BOKF”), as successor indenture trustee for certain Second Lien Notes, filed an action against CEC in the Southern District of New York, captioned BOKF, N.A. v. Caesars Entertainment Corporation, Case No. 15-cv-1561-SAS (the “BOKF SDNY Action”). In the BOKF SDNY Action, BOKF asserted that CEC remains liable under the parent guarantee formerly applicable to the Second Lien Notes and breached the Second Lien Notes Indentures by purportedly releasing such guarantee. BOKF seeks a declaratory judgment that the guarantee was not released and is still in effect. BOKF also alleges claims for damages resulting from CEC’s violation of the TIA, intentional interference with contractual relations, and breach of the duty of good faith and fair dealing. Additionally, on June 16, 2015, the First Lien Notes Indenture Trustee commenced an action in the Southern District of New York, captioned UMB Bank, N.A. v. Caesars Entertainment Corporation, Case No. 15-cv-4643-SAS (the “UMB SDNY Action” and collectively with the BOKF SDNY Action, the “Secured Noteholder SDNY Actions”). The UMB SDNY Action seeks to reinstate CEC’s guarantee of payment on CEOC’s

 

41 

BOKF (and other Parent Guaranty litigants) have asserted that the guarantees were “stripped.” The Debtors provide this overview of the Parent Guaranty Litigation in the interest of full disclosure and take no position on issues that remain subject to this ongoing litigation.

 

31


First Lien Notes. On August 27, 2015, Judge Scheindlin denied BOKF’s and UMB’s motions for partial summary judgment, which sought a declaration that the releases of CEC’s guarantee in May 2014 violated section 316(b) of the TIA and certified her own opinion for an appeal to the United States Court of Appeals for the Second Circuit. See BOKF, N.A. v. Caesars Entm’t Corp., 2015 WL 5076785 (S.D.N.Y. Aug. 27, 2015). On December 22, 2015, the United States Court of Appeals for the Second Circuit denied CEC’s interlocutory appeal. Additionally, on November 20, 2015, BOKF and UMB filed a second partial summary judgment motion in the Secured Noteholder SDNY Actions focusing on contract interpretation issues related to the dispute. On January 5, 2016, Judge Scheindlin denied the second motion for summary judgment because the matter would not be case dispositive, and therefore did not reach the merits of the issue. See BOKF, N.A. v. Caesars Entm’t Corp., 2016 WL 67728 (S.D.N.Y. Jan. 5, 2016). Since the reassignment of the Secured Noteholder SDNY Actions to Judge Rakoff following Judge Scheindlin’s resignation, the Secured Noteholder SDNY Actions are following the same summary judgment and trial schedule as the Unsecured Noteholder SDNY Actions set forth above. As discussed more fully in Article IV.S.1 below, the BOKF SDNY Action was enjoined by the Bankruptcy Court from February 26, 2016, to May 9, 2016, though pre-trial activity was allowed to continue.42 That injunction has expired. On June 6, 2016, the Debtors filed an emergency motion seeking a temporary restraining order and preliminary injunction enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits because the Debtors believe such an injunction is necessary to protect the Debtors’ ability to reorganize in the Chapter 11 Cases [Adv. Case. No. 15-00149 (ABG), Docket No. 241]. After an evidentiary hearing held on June 8, 9, and 13, the Bankruptcy Court granted the Debtors’ motion on June 15, 2016, enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits until August 29, 2016.43 The Southern District of New York has scheduled oral argument in the SDNY Actions for August 30, 2016. The Debtors reserve their rights with respect to further injunctions.

The most recent guaranty action to be commenced was on October 21, 2015, when the indenture trustee for the Debtors’ 10.75% Subsidiary-Guaranteed Notes (the “Subsidiary-Guaranteed Notes Trustee”) filed an action against CEC in the Southern District of New York, captioned Wilmington Trust, National Association v. Caesars Entertainment Corp., Case No. 15-cv-08280-UA (the “Wilmington Trust SDNY Action”), seeking to void the removal of CEC’s guarantee of the Subsidiary-Guaranteed Notes and a money judgment against CEC for outstanding interest due and payable under such notes. CEC filed its answer to the complaint on November 23, 2015. The Wilmington Trust SDNY Action was initially assigned to Judge Scheindlin but has been reassigned to Judge Rakoff. The Wilmington Trust SDNY Action is now following the same summary judgment and trial schedule as the Unsecured Noteholder SDNY Actions set forth above. As discussed more fully in Article IV.J.3 below, pursuant to the SGN RSA, the Consenting SGN Creditors instructed the Subsidiary-Guaranteed Notes Trustee to seek a mutually agreed stay with CEC in respect of the Wilmington Trust SDNY Action in order to stay such action through the Confirmation Hearing.

 

  E. Prepetition Restructuring Negotiations and Prepetition RSA

The Debtors engaged their stakeholders, including certain First Lien Lenders, certain First Lien Noteholders, and CEC, in extensive, multilateral, arm’s-length negotiations regarding the terms of a potential restructuring beginning in late summer 2014.

These negotiations were complicated by a number of factors. First, certain of the Debtors’ creditors also held credit default swap positions, which potentially held significant value if the Debtors defaulted on their debts. Parties holding credit default swap positions could therefore be incentivized to seek outcomes that maximized recoveries on those derivative positions rather than their interest in the Debtors’ indebtedness while certain other parties held credit default positions that were incentivized to keep the Debtors out of bankruptcy to ensure that such parties would not have to cover such positions. Second, CEC, the Debtors, and certain creditors also were engaged in ongoing, contentious litigation described above. Third, it was critical that CEC support any potential restructuring given gaming regulatory requirements and the fact that the Caesars’ businesses are interrelated through shared services and employees as well as the Total Rewards® program. Similarly, the Debtors could trigger significant tax obligations—including for the Debtors—by separating from CEC.

 

42  UMB agreed to be bound by the Bankruptcy Court’s decision and therefore the UMB SDNY Action was also stayed for the same period of time.
43 

UMB has also agreed to be bound by this decision, and therefore the UMB SDNY Action has been further stayed for the same period of time.

 

32


The Debtors and certain of their stakeholders examined various structures in an effort to maximize the value of their Estates and creditor recoveries. After significant diligence and hard-fought negotiations, the parties agreed to reorganize the Debtors’ businesses as a REIT, which would enhance the value of the Debtors’ real estate and allow the Debtors to provide their creditors with improved recoveries through the issuance of more cash and debt. As part of those negotiations, the First Lien Noteholders agreed to, among other things, receive less than a par recovery and to take a significant portion of that recovery in the form of equity. The Debtors also focused on maximizing recoveries for Holders of Non-First Lien Claims, and successfully negotiated for improved recoveries for such creditors from the initial proposals while also maintaining recoveries for Holders of Allowed Prepetition Credit Agreement Claims and Holders of Allowed Secured First Lien Notes Claims.

Despite this substantial progress, certain of the First Lien Noteholders and each of the First Lien Lenders involved in the negotiations withdrew their support on December 11, 2014. The Debtors, CEC, and certain of the First Lien Noteholders, however, continued negotiating and ultimately reached agreement on the terms of a comprehensive restructuring. This proposed restructuring was documented in the Prepetition RSA, which was initially executed on December 19, 2014, by the Debtors, CEC, certain Apollo-affiliated funds, and Holders of approximately 38 percent of Secured First Lien Notes Claims. As of the Petition Date, First Lien Noteholders owning over 80 percent in aggregate principal amount of the First Lien Notes, and approximately 15 percent in aggregate principal amount outstanding under the Prepetition Credit Agreement, had signed the Prepetition RSA.

As described in greater detail below, the Debtors continued to negotiate with their creditors throughout the Chapter 11 Cases. These negotiations led to a further amended Prepetition RSA, other restructuring support agreements with additional constituents (including the Bank RSA (as defined below) with Holders of more than 80 percent of Prepetition Credit Agreement Claims), and enhanced recoveries across the Debtors’ capital structure.

 

  F. Proposed Merger of CEC and CAC

On December 22, 2014, CEC and CAC announced that they had entered into a definitive agreement to merge in an all-stock transaction (the “Merger”). The Merger is conditioned on the confirmation and effectiveness of a plan of reorganization on the material terms set forth in the Prepetition RSA. In a press release issued that same day, CEC expressed that it believed the Merger would “position the merged company to support the restructuring of CEOC without the need for any significant outside financing” and would “position it to be a strong guarantor for the restructured CEOC’s obligations, including lease payments its ‘OpCo’ subsidiary will make to ‘PropCo.’” See Caesars Entertainment Corporation, Report on Form 8-K, Ex. 99.1 (Dec. 22, 2014). Among other things, the merger will provide CEC with access to cash necessary to fund its obligations to the Debtors as contemplated by the Plan and, if CEC is unable to complete the merger for any reason, there is material risk that CEC will not be able to meet its funding obligations under the Plan and the feasibility of the Plan will be threatened.

Pursuant to the terms of the merger agreement, each outstanding share of CAC class A common stock will be exchanged for 0.664 shares of New CEC Common Equity, subject to adjustments set forth in the merger agreement. As a result, CEC stockholders will own approximately 62 percent of the combined company on a fully diluted basis and CAC stockholders will own approximately 38 percent. The merged company is expected to continue to conduct business as Caesars Entertainment Corporation and is expected to continue trading on the NASDAQ under the ticker “CZR.” Because of the New CEC Common Equity to be contributed to the Debtors’ Estates pursuant to the Plan (as discussed more fully herein), CEC and CAC are expected to amend their merger documents. Although the outcome of such amendments is not known at this time, pursuant to the CEC RSA and the CAC RSA (each as defined below), CEC and CAC have committed to enter into a definitive merger agreement that is reasonably acceptable to the Debtors by June 30, 2016.

On December 30, 2014, certain shareholders of CAC commenced a class action lawsuit in the Eighth Judicial District Court of Clark County, Nevada, which is captioned Nicholas Koskie, on behalf of himself and all others similarly situated, v. Caesars Acquisition Company, Caesars Entertainment Corp., Marc Beilinson, Dhiren Fonseca, Philip Erlanger, Karl Peterson, David Sambur, Mark J. Rowan and Don R. Kornstein, Case

 

33


No. A-14-711712-C (the “Merger Class Action”). The plaintiffs to the Merger Class Action allege, among other things, that certain of the defendants breached their fiduciary duties in approving the proposed merger of CEC and CAC. As of the date hereof, the Merger Class Action remains pending and the deadline to respond to the Merger Class Action has been indefinitely extended by agreement of the parties involved. It is unclear at this time whether the Merger Class Action also seeks to enjoin the Merger. As noted above, any such injunction (or the failure of the proposed merger) would materially impact the Plan.

As discussed more fully in Article V.F.2, the Merger is a necessary condition precedent to the Plan, and the recoveries contemplated by the Plan are expressly conditioned on the value of the merged CEC–CAC.44

 

  G. The Debtors’ Financial Outlook and Business Strategy Going Forward

Despite the Debtors’ substantial prepetition efforts to reduce the amount of their outstanding funded debt, relax financial covenants, and extend maturities, including through various asset sales and refinancings, the Debtors’ balance sheet remained unsustainable in light of both present and expected market conditions. Accordingly, faced with the prospect of a liquidity crisis in late 2015, the Debtors commenced the Chapter 11 Cases to effectuate a restructuring to right size their balance sheet, address operational issues, and monetize claims they hold against CEC and its affiliates. With these issues addressed, the Debtors believe they will be positioned to leverage their core operations, business model, and customer base to return to profitability. Despite the prior downward pressure placed on the Debtors’ fundamental business operations, the Debtors remain market leaders in the gaming industry and continue to advantageously leverage the synergies between their regional and destination properties to maximize their share of the gaming market. The continued strength of the Debtors’ fundamental operations, coupled with the deleveraging of the Debtors’ balance sheet and the structural reorganization of moving most of the Debtors’ real property into a real estate investment trust structure that will result under the Plan, will increase the Debtors’ competitiveness and maximize the value of the Debtors’ businesses as a going concern. The Debtors expect that the efficient and successful consummation of the proposed restructuring will enable the Debtors to profitably operate their business and aggressively pursue opportunities as they arise.

ARTICLE IV.

MATERIAL EVENTS OF THE CHAPTER 11 CASES

 

  A. Involuntary Chapter 11 Proceedings

On January 12, 2015, three days before the Debtors’ anticipated commencement of the Chapter 11 Cases in the Northern District of Illinois, three petitioning creditors, each a Second Lien Noteholder (the “Petitioning Creditors”), filed an involuntary bankruptcy petition against CEOC, but no other Debtor, in the United States Bankruptcy Court for the District of Delaware (the “Delaware Bankruptcy Court”) captioned In re Caesars Entertainment Operating Company, Inc., No. 15-10047 (the “Involuntary Proceeding”).

On January 14, 2015, the Petitioning Creditors filed in the Involuntary Proceeding the Motion of Petitioning Creditors, Pursuant to Section 105(a) of the Bankruptcy Code and Bankruptcy Rule 1014(b), for an Order (I) Establishing Venue for the Chapter 11 Cases of Caesars Entertainment Operating Company, Inc. and its Debtor Affiliates in the District of Delaware and (II) Granting Related Relief [Del. Involuntary Docket No. 26] (the “Venue Motion”). On January 15, 2015, the Delaware Bankruptcy Court entered the Order Pursuant to Section 105(a) of the Bankruptcy Code and Bankruptcy Rule 1014(b), Staying Parallel Proceeding [Del. Involuntary Docket No. 47] (the “Stay Order”), which stayed the voluntary Chapter 11 Cases before the Bankruptcy Court pending the Delaware Bankruptcy Court’s consideration of the Venue Motion.

On January 26 and 27, 2015, the Delaware Bankruptcy Court held an evidentiary hearing to consider the relief requested by the Venue Motion. On January 28, 2015, the Delaware Bankruptcy Court entered an order in the Involuntary Proceeding [Del. Involuntary Docket No. 220] lifting the stay imposed by the Stay Order and transferring venue of the Involuntary Proceeding to the Northern District of Illinois. The Involuntary Proceeding was re-captioned In re Caesars Entertainment Operating Company, Inc., No. 15-03193.

 

44 

For further information regarding CEC and CAC, including recent financial performance, please see Caesars Entertainment Corporation, Report on Form 10-K (Feb. 29, 2016) and Caesars Acquisition Company, Report on Form 10-K (Feb. 29, 2016).

 

34


On February 5, 2015, the Petitioning Creditors filed a motion [Involuntary Docket No. 15] (the “Motion to Consolidate”) seeking to (a) consolidate the Involuntary Proceeding and the Chapter 11 Cases and (b) asking the Bankruptcy Court to (i) take judicial notice that an order for relief has been entered with respect to CEOC’s chapter 11 case and (ii) determine that such order for relief applies to all Debtors in the consolidated Chapter 11 Cases in all respects. The Petitioning Creditors argued, among other things, that by filing its voluntary petition for relief under chapter 11 of the Bankruptcy Code, CEOC effectively consented to the Involuntary Proceeding against it and that, as a result, no further litigation regarding the merits of the Involuntary Proceeding was necessary, and that January 12, 2015 should be established as the petition date for the Chapter 11 Cases for each Debtor. After briefing by several parties, including CEOC, the Petitioning Creditors, the Ad Hoc First Lien Groups (as defined herein), the Unsecured Creditors Committee, the Second Priority Noteholders Committee, and the Subsidiary-Guaranteed Notes Indenture Trustee, on March 25, 2015, the Bankruptcy Court announced that it would defer ruling on the Motion to Consolidate pending resolution of a trial on the Involuntary Proceeding.

The Bankruptcy Court held a seven-day evidentiary trial from October 5, 2015, through October 16, 2015, to consider the propriety of the Involuntary Proceeding. The parties completed post-trial briefing on November 20, 2015. The Bankruptcy Court has not issued a decision on the propriety of the Involuntary Proceeding as of the date hereof.

Relatedly, on April 7, 2015, the Unsecured Creditors Committee filed a motion in the voluntary Chapter 11 Cases seeking an order compelling CEOC to consent to the Involuntary Proceeding [Docket No. 1091] (the “Motion to Compel”). In the Motion to Compel, the Unsecured Creditors Committee argued, among other things, that CEOC could not refuse to consent to the Involuntary Proceeding because (i) failure to consent could waive a potential preference action related to certain account control agreements entered into by CEOC with the First Lien Collateral Agent on October 15 and October 16, 2014, (ii) the potential preference action is an estate claim and cause of action that is property of the estate under section 541 of the Bankruptcy Code, and (iii) CEOC may not use property of the estate outside the ordinary course of business without first obtaining the Bankruptcy Court’s approval. After requesting no further briefing on the issue [Docket No. 1117], the Bankruptcy Court denied the Motion to Compel [Docket No. 1351] and the Unsecured Creditors Committee’s subsequent motion to reconsider [Docket No. 1522]. On May 15, 2015, the Unsecured Creditors Committee filed a notice of appeal regarding the Motion to Compel [Docket No. 1564], and such appeal was docketed with the United States District Court for the Northern District of Illinois, Eastern Division (the “District Court”) and captioned Statutory Unsecured Claimholders’ Committee v. Caesars Entertainment Operating Company, Inc., Case No. 1:15-cv-04362 (the “Motion to Compel Appeal”). On October 15, 2015, the appellant Unsecured Creditors Committee filed their opening brief in the Motion to Compel Appeal [Docket No. 24]. On November 16, 2015, the appellees, CEOC, and the intervening Ad Hoc First Lien Groups filed their briefs [Docket Nos. 29, 30, 31] and the appellant filed its reply on November 30, 2015 [Docket No. 43]. Pursuant to the UCC RSA, the Debtors expect that the Unsecured Creditors Committee will seek to have the Motion to Compel Appeal held in abeyance through the Confirmation Hearing.

The Unsecured Creditors Committee also filed a motion seeking to intervene in the Involuntary Proceeding for the limited purpose of protecting its rights in the Motion to Compel Appeal on October 2, 2015 [Docket No. 171]. The Bankruptcy Court denied this request at a hearing on October 21, 2015.

 

  B. First Day Pleadings and Certain Related Relief

The Debtors devoted substantial efforts prior to the commencement of the Chapter 11 Cases to prepare to quickly and efficiently stabilize their operations and preserve and restore their relationships with vendors, customers, employees, landlords, and utility providers that could be adversely affected by the commencement of the Chapter 11 Cases. As a result of these efforts, the Debtors were able to minimize any negative effects on their business that otherwise may have resulted from the commencement of the Chapter 11 Cases.

On the Petition Date, in addition to the voluntary petitions for relief filed by the Debtors under chapter 11 of the Bankruptcy Code, the Debtors also filed a number of motions and applications (collectively, the “First Day Motions”) with the Bankruptcy Court. The relief sought in the First Day Motions was necessary to enable the

 

35


Debtors to preserve value and efficiently implement their proposed restructuring process with minimal disruption and delay. The relief requested in the First Day Motions, among other things, prevented interruptions to the Debtors’ business operations and eased the strain on the Debtors’ relationships with certain essential stakeholders.

 

  1. Stabilizing Operations

Recognizing that even a brief interruption to the Debtors’ operations would adversely affect customer and supplier relationships, revenues, and profits, the Debtors filed various First Day Motions to minimize the adverse effects that would otherwise be caused by the commencement of the Chapter 11 Cases. Through the First Day Motions, the Debtors sought authority to, among other things, pay certain prepetition claims and obligations and continue certain existing programs. The relief requested by the First Day Motions was essential to facilitating the Debtors’ smooth transition into chapter 11, allowed the Debtors to continue their business operations without interruption, and maintained (or even bolstered) confidence among the Debtors’ suppliers, customers, and creditors as to the likelihood of the Debtors’ successful reorganization. Though certain parties objected to the relief sought by the First Day Motions, the Debtors were able to resolve all such objections consensually.

 

    Cash Collateral Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing Use of Cash Collateral, (II) Granting Adequate Protection, (III) Modifying the Automatic Stay to Permit Implementation, (IV) Scheduling a Final Hearing, and (V) Granting Related Relief [Docket No. 22] (the “Cash Collateral Motion”). Prior to the commencement of the Chapter 11 Cases, the Debtors were able to reach an agreement with both an ad hoc group of certain First Lien Lenders (the “Ad Hoc Committee of First Lien Banks”) and an ad hoc group of certain First Lien Noteholders (the “Ad Hoc Committee of First Lien Noteholders” and collectively with the Ad Hoc Committee of First Lien Banks, the “Ad Hoc First Lien Groups”) regarding the consensual use of cash collateral. On January 15, 2015, the Bankruptcy Court entered an order approving the Cash Collateral Motion on an interim basis [Docket No. 47], which, among other things, describes the terms and conditions for the use of the Debtors’ cash collateral and provides adequate protection to the certain prepetition secured creditors. Following entry of the interim order, the Debtors engaged in negotiations with all relevant parties to resolve certain objections that had been filed by the Unsecured Creditors Committee [Docket No. 452] and the Subsidiary-Guaranteed Notes Trustee [Docket No. 487]. The Bankruptcy Court entered a negotiated final order (the “Cash Collateral Order”) granting the relief requested on March 26, 2015 [Docket No. 988].

 

    Wages Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to Pay Certain Prepetition (A) Wages, Salaries, and Other Compensation, (B) Reimbursable Employee Expenses, and (C) Obligations Relating to Medical and Other Benefits Programs, and (II) Granting Related Relief [Docket No. 7] (the “Wages Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Wages Motion on an interim basis [Docket No. 54]. Following entry of the interim order, the Debtors engaged in negotiations with all relevant parties to resolve certain informal objections from interested parties and certain formal objections that had been filed by the Second Priority Noteholders Committee [Docket No. 430] and the Unsecured Creditors Committee [Docket No. 443] to the relief sought by the Wages Motion, including with respect to the Debtors’ Deferred Compensation Plans, the use of CES to provide the Debtors’ payroll services, and the Debtors’ ordinary-course rank-and-file employee bonus programs. Following negotiations with these stakeholders, the Debtors filed, and the Bankruptcy Court entered, an agreed final order granting the relief requested on March 4, 2015 [Docket No. 617] (the “Wages Order”).

 

   

Cash Management Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to (A) Continue Using Their Cash Management System, (B) Maintain Their Existing Bank Accounts and Business Forms, and (C) Continue Intercompany Transactions, and (II) Granting Related Relief [Docket No. 8] (the “Cash Management Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Cash Management Motion on an interim basis [Docket No. 59]. Following entry of the interim order, the Debtors engaged in negotiations with all relevant parties to resolve certain objections that had been

 

36


 

filed by the Second Priority Noteholders Committee [Docket No. 440], the Unsecured Creditors Committee [Docket No. 443], the Ad Hoc Committee of First Lien Banks [Docket No. 468], and the Subsidiary-Guaranteed Notes Trustee [Docket No. 481]. As a result of these negotiations, the Debtors filed an agreed final order which established certain notice and reporting requirements regarding the Debtors use of their bank accounts and intercompany transactions between Debtors and between the Debtors and their non-Debtor affiliates. [Docket No. 968]. The Bankruptcy Court entered the agreed final order granting the relief requested on March 25, 2015 [Docket No. 989] (the “Cash Management Order”).

 

    Critical Vendors Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing the Payment of Prepetition Claims of Certain Vendors, (II) Approving and Authorizing Procedures Related Thereto, and (III) Granting Related Relief [Docket No. 11] (the “Critical Vendors Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Critical Vendors Motion on an interim basis [Docket No. 57]. Following entry of the interim order, the Debtors engaged in discussions with committees for each vendor regarding a formal objection to the Critical Vendors Motion filed by the Unsecured Creditors Committee [Docket No. 443] and informal objections raised by interested parties to the relief sought by the Critical Vendors Motion, including with respect to reporting, notice, and consultation rights. Following negotiations with these stakeholders, the Debtors filed, and the Bankruptcy Court entered, an agreed final order granting the relief requested on March 4, 2015 [Docket No. 620].

 

    Lienholders, 503(b)(9), and Foreign Vendors Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing Payment of (A) Prepetition Claims of Certain Lien Claimants, (B) Section 503(b)(9) Claims, and (C) Foreign Vendor Claims, (II) Approving Procedures Related Thereto, and (III) Granting Related Relief [Docket No. 9] (the “Lienholders, 503(b)(9), and Foreign Vendors Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Lienholders, 503(b)(9), and Foreign Vendors Motion on an interim basis [Docket No. 55]. Following entry of the interim order, the Debtors engaged in discussions with the Unsecured Creditors Committee regarding its formal objection to the relief sought by the Lienholders, 503(b)(9), and Foreign Vendors Motion [Docket No. 443] as well as certain other interested parties regarding their concerns about the requested relief, including with respect to reporting, notice, and consultation rights. Following negotiations with the Unsecured Creditors Committee and their other stakeholders, the Debtors filed, and the Bankruptcy Court entered, an agreed final order granting the relief requested on March 4, 2015 [Docket No. 618].

 

    PACA Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to Pay Claims Arising Under the Perishable Agricultural Commodities Act, and (II) Granting Related Relief [Docket No. 10] (the “PACA Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the PACA Motion on an interim basis [Docket No. 56]. The Bankruptcy Court entered a final order granting the relief requested on March 4, 2015 [Docket No. 619].

 

    Customer Programs Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of an Order (A) Authorizing the Debtors to Maintain and Administer Their Existing Customer Programs and Honor Certain Prepetition Obligations Related Thereto, and (B) Granting Related Relief [Docket No. 12] (the “Customer Programs Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Customer Programs Motion on a final basis [Docket No. 49].

 

   

Taxes Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to Pay Certain Prepetition Taxes and Fees, and (II) Granting Related Relief [Docket No. 13] (the “Taxes Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Taxes Motion on an interim basis [Docket No. 58]. Following entry of the interim order, the Debtors engaged in negotiations with all relevant parties to resolve a formal objection that had been filed by the Unsecured Creditors Committee [Docket No. 443] and certain

 

37


 

informal objections to the Taxes Motion. Following negotiations with the representatives of the Official Committee, the Debtors filed, and the Bankruptcy Court entered, an agreed final order granting the relief requested on March 4, 2015 [Docket No. 621].

 

    Insurance Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Authorizing the Debtors to (A) Continue Their Prepetition Insurance Coverage, (B) Satisfy Payment of Prepetition Obligations Related to That Insurance Coverage in the Ordinary Course of Business, and (C) Renew, Supplement, or Enter into New Insurance Coverage in the Ordinary Course of Business, and (III) Granting Related Relief [Docket No. 14] (the “Insurance Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Insurance Motion on an interim basis [Docket No. 91]. Following entry of the interim order, the Debtors engaged in discussions with representatives of the Unsecured Creditors Committee and Second Priority Noteholders Committee regarding their formal objections to the Insurance Motion, including with respect to payment of insurance-coverage allocations between the Debtors and their non-Debtor affiliates and the Debtors ability to enter into new policies. The Debtors filed, and the Bankruptcy Court entered, an agreed final order granting the relief requested on March 4, 2015 [Docket No. 622].

 

    Surety Bond Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Approving Continuation of Surety Bond Program, and (II) Granting Related Relief [Docket No. 15] (the “Surety Bond Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Surety Bond Motion on a final basis [Docket No. 50].

 

    Utilities Motion. On February 2, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Determining Adequate Assurance of Utility Payment, (II) Approving Procedures for Resolving any Disputes Concerning Adequate Assurance, and (III) Granting Related Relief [Docket No. 204] (the “Utilities Motion”). On February 11, 2015, the Bankruptcy Court entered an order approving the Utilities Motion on an interim basis [Docket No. 341]. Following the resolution of certain formal and informal objections by utility providers, the Bankruptcy Court entered a final order granting the relief requested on February 26, 2015 [Docket No. 502].

 

  2. Procedural and Administrative Motions

To facilitate a smooth and efficient administration of the Chapter 11 Cases and to reduce the administrative burden associated therewith, the Debtors filed the following motions seeking authorization to implement certain procedural and administrative relief:

 

    Joint Administration Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Directing Joint Administration of Related Chapter 11 Cases, and (II) Granting Related Relief (the “Joint Administration Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Joint Administration Motion on a final basis [Docket No. 43].

 

    Case Management Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of an Order Approving Case Management Procedures [Docket No. 18] (the “Case Management Motion”). On February 19, 2015, the Bankruptcy Court entered an order approving the Case Management Motion on a final basis [Docket No. 395]. On March 20, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order (A) Modifying Case Management Procedures and (B) Granting Related Relief [Docket No. 936] (the “Case Management Modification Motion”). On April 15, 2015, the Bankruptcy Court entered an order granting in part and denying in part the Case Management Modification Motion and approving certain amended case management procedures [Docket No. 1165] (the “Case Management Order”). The Bankruptcy Court has further amended the Case Management Order [Docket Nos. 1911, 2059, 3067] waiving the Local Bankruptcy Rule 15-page limit for fee applications, clarifying that the Case Management Order (as amended) applies to adversary cases in the Chapter 11 Cases unless the Bankruptcy Court orders otherwise, and permitting the Debtors to notice claim objections for any day the Bankruptcy Court is hearing chapter 7 or chapter 11 cases (rather than just as on omnibus hearing dates, as required for all other motions and claim objections filed by non-Debtor parties).

 

38


    Schedules and Statements Extension Motion. On the Petition Date, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Extending Deadline to File Schedules of Assets and Liabilities, Current Income and Expenditures, and Executory Contracts and Unexpired Leases and Statements of Financial Affairs, and (II) Granting Related Relief [Docket No. 19] (the “Schedules and Statements Extension Motion”). On January 15, 2015, the Bankruptcy Court entered an order approving the Schedules and Statements Extension Motion on a final basis [Docket No. 60].

 

  3. Retention of Professionals

To assist the Debtors in carrying out their duties as debtors-in-possession and to otherwise represent the Debtors’ interests in the Chapter 11 Cases, the Debtors filed applications and the Bankruptcy Court entered orders for the retention of various professionals:

 

    Prime Clerk LLC, as Notice and Claims Agent to the Debtors [Docket Nos. 16, 51];

 

    Kirkland & Ellis LLP, as counsel to the Debtors [Docket Nos. 381, 1713];45

 

    AP Services, LLC (“AlixPartners”), to provide the Debtors a chief restructuring officer and certain additional personnel [Docket Nos. 382, 616];

 

    Millstein, as financial advisor and investment banker to the Debtors [Docket Nos. 665, 991];

 

    DLA Piper LLP, as special conflicts counsel to the Debtors [Docket Nos. 375, 1715];

 

    Paul Hastings LLP as special conflicts counsel to the Debtors [Docket Nos. 649, 1940];

 

    KPMG LLP, as tax consultants to the Debtors [Docket Nos. 376, 586]; and

 

    Mesirow Financial Consulting, LLC (“Mesirow”) as independent financial advisor to the Special Governance Committee and as potential expert witness [Docket Nos. 383, 997].

 

    Due to certain organizational changes, Mesirow exited the financial restructuring business and the lead expert responsible for advising the Special Governance Committee on its investigation moved to Baker Tilly Virchow Krause, LLP (“Baker Tilly”). The Debtors filed a retention application for Baker Tilly [Docket No 3198]. Due to an issue of disinterestedness involving a former Mesirow employee, as more fully described in Article IV.F, Judge Goldgar indicated that he would deny Mesirow’s final fee application and Baker Tilly’s retention application. Counsel for Mesirow and the Debtors, respectively, decided to withdraw the Mesirow final fee application and the Baker Tilly retention application [Docket Nos. 3428, 3427].

 

45  On February 25, 2015, the Second Priority Notes Committee objected to the retention of Kirkland & Ellis LLP as counsel to the Debtors [Docket No. 464]. The Bankruptcy Court approved the retention of Kirkland & Ellis LLP as counsel to the Debtors following extensive discovery and a two-day trial [Docket No. 1713]. On October 21, 2015, the Second Priority Notes Committee filed a motion to reconsider the order granting the retention of Kirkland & Ellis LLP as Debtors’ counsel (the “Motion to Reconsider”) [Docket No. 2470]. On October 22, 2015, the Bankruptcy Court entered an order denying the Motion to Reconsider without prejudice, because the Second Priority Notes Committee filed redacted documents without first receiving permission from the Bankruptcy Court to do so [Docket No. 2501]. On October 30, 2015, the Second Priority Notes Committee refiled an unredacted version of the Motion to Reconsider [Docket No. 2514]. On November 19, 2015, the Bankruptcy Court entered an order construing the motion as a motion to revoke Kirkland & Ellis LLP’s retention as Debtors’ counsel, narrowing the scope of the issues presented, and ordering limited discovery related thereto [Docket No. 2636]. As of the date hereof, briefing on this matter is ongoing.

 

39


On February 18, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order Establishing Procedures for Interim Compensation and Reimbursement of Expenses for Professionals [Docket No. 377] (the “Interim Compensation Motion”), which provides for procedures for the interim compensation and reimbursement of expenses of retained Professionals in the Chapter 11 Cases. On March 4, 2015, the Bankruptcy Court entered an order approving the Interim Compensation Motion [Docket No. 587] (the “Interim Compensation Order”). The Interim Compensation Order, along with the oversight provided by the Fee Committee, governs the compensation of retained professionals in the Chapter 11 Cases.

 

  C. Appointment of Official Committees

 

  1. Unsecured Creditors Committee

On February 5, 2015, the U.S. Trustee filed the Notice of Appointment of Official Unsecured Creditors Committee [Docket No. 264] notifying parties in interest that the U.S. Trustee had appointed a statutory committee of unsecured creditors (the “Unsecured Creditors Committee”) in the Chapter 11 Cases. Due to subsequent changes in membership, on February 6, 2015, the U.S. Trustee filed the Amended Notice of Appointment of Official Unsecured Creditors Committee [Docket No. 317] and, on September 25, 2015, the U.S. Trustee filed the Second Amendment Appoint of Unsecured Creditors Committee [Docket No. 2298]. The Unsecured Creditors Committee is currently comprised of (a) the National Retirement Fund, (b) International Game Technology, (c) US Foods, Inc., (d) Law Debenture Trust Company of New York, solely in its capacity as Senior Unsecured Notes Indenture Trustee, (e) Relative Value-Long/Short Debt, a Series of Underlying Funds Trust, (f) Wilmington Trust, N.A., solely in its capacity as Subsidiary-Guaranteed Notes Indenture Trustee, (g) Park Hotels & Resorts Inc. f/k/a Hilton Worldwide, Inc., (h) Earl of Sandwich (Atlantic City) LLC, and (i) PepsiCo, Inc.

To assist the Unsecured Creditors Committee in carrying out its duties under the Bankruptcy Code during the Chapter 11 Cases, the Unsecured Creditors Committee filed applications and the Bankruptcy Court entered orders for the retention of the following professionals:

 

    Proskauer Rose LLP, as counsel to the Unsecured Creditors Committee [Docket Nos. 657, 998];

 

    FTI Consulting, Inc., as financial advisor to the Unsecured Creditors Committee [Docket Nos. 658, 999];

 

    Jefferies LLC, as investment banker to the Unsecured Creditors Committee [Docket Nos. 661, 1001];

 

    G.C. Andersen Partners, LLC, as gaming industry advisor to the Unsecured Creditors Committee [Docket Nos. 660, 1000]; and

 

    Kurtzman Carson Consultants LLC (“KCC”), as information agent for the Unsecured Creditors Committee [Docket Nos. 649, 994].46

 

  2. Second Priority Noteholders Committee

On February 5, 2015, the U.S. Trustee filed the Notice of Appointment of Official Committee of Second Priority Noteholders [Docket No. 266] notifying parties in interest that the U.S. Trustee had appointed a statutory committee comprised of certain Second Lien Noteholders (the “Second Priority Noteholders Committee” and together with the Unsecured Creditors Committee, the “Official Committees”) in the Chapter 11 Cases. The Second Priority Noteholders Committee is comprised of (a) Wilmington Savings Fund Society, FSB, (b) BOKF, N.A., (c) Delaware Trust Company, (d) Tennenbaum Opportunities Partner V, LP, (e) Centerbridge Credit Partners Master LP, (f) Palomino Fund Ltd, and (g) Oaktree FF Investment Fund LP.

 

46  KCC also serves as the information agent for the Second Priority Noteholders Committee.

 

40


To assist the Second Priority Noteholders Committee in carrying out its duties under the Bankruptcy Code during the Chapter 11 Cases, the Second Priority Noteholders Committee filed applications and the Bankruptcy Court entered orders for the retention of the following professionals:

 

    Jones Day, as counsel to the Second Priority Noteholders Committee [Docket Nos. 662, 1002];

 

    Zolfo Cooper, LLC, as restructuring and forensic advisors to the Second Priority Noteholders Committee [Docket Nos. 659, 1003];

 

    Houlihan Lokey Capital, Inc., as financial advisor and investment banker to the Second Priority Noteholders Committee [Docket Nos. 656, 1004]; and

 

    Kurtzman Carson Consultants LLC (“KCC”), as information agent for the Second Priority Noteholders Committee [Docket Nos. 649, 994].

On February 19, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order Disbanding the Official Committee of Second Priority Noteholders, Reconstituting It with the Creditors’ Committee or, Alternatively, Limiting its Scope, Fees and Expenses [Docket No. 384] (the “Motion to Disband”). In the Motion to Disband, the Debtors requested entry of an order disbanding the Second Priority Noteholders Committee or reconstituting the Unsecured Creditors Committee and the Second Priority Noteholders Committee into one committee. Alternatively, if the Second Priority Noteholders Committee remained in existence, the Motion to Disband sought an order limiting its scope. On March 9, 2015, the Bankruptcy Court entered an order [Docket No. 634] and issued a formal written opinion [Docket No. 633] denying the requested relief as being beyond the Bankruptcy Court’s power to grant.

 

  3. Appointment of Fee Committee

Given the size and complexity of the Chapter 11 Cases, on April 8, 2015, the U.S. Trustee proposed, and the Debtors, the Unsecured Creditors Committee, and the Second Priority Noteholders Committee agreed, to recommend that the Bankruptcy Court appoint a committee (the “Fee Committee”) to, among other things, review and report on, as appropriate, monthly invoices submitted in accordance with the Interim Compensation Order and all interim and final fee applications for compensation and reimbursement of expenses filed by professionals paid from the Debtors’ Estates, other than in the ordinary course. On April 27, 2015, the Bankruptcy Court entered an order appointing the Fee Committee [Docket No. 1319]. The Fee Committee is comprised of five members: (a) one independent member (Nancy Rapoport); (b) one member appointed by and representative of the U.S. Trustee (Roman L. Sukley); (c) one member appointed by and representative of the Debtors (Mary E. Higgins); (d) one member appointed by and representative of the Unsecured Creditors Committee (Julie Johnston-Ahlen); and (e) one member appointed by and representative of the Second Priority Noteholders Committee (James Bolin). On August 31, 2015, December 18, 2015, and April 27, 2016, the Fee Committee filed its first, second, and third reports, respectively, related to the three interim compensation applications submitted by the professionals in the Chapter 11 Cases pursuant to the Interim Compensation Order [Docket Nos. 2140, 2750, 3595].

 

  D. Special Governance Committee Investigation

On June 27, 2014, the Debtors appointed Steven Winograd and Ronen Stauber as independent directors of CEOC. Messrs. Winograd and Stauber are each disinterested directors who are not beholden to CEC, its affiliates other than CEOC or the Sponsors. They have no current ties to CEC, its affiliates other than CEOC or the Sponsors that would compromise their impartiality, and their compensation as directors of CEOC is not contingent upon taking or approving any particular action.

Shortly after their appointment, the CEOC Board of Directors formed the Special Governance Committee, which is comprised of Messrs. Winograd and Stauber. Among other things, the Special Governance Committee commenced an independent investigation (the “SGC Investigation”) into potential claims the Debtors and/or their creditors may have against CEC or its affiliates related to various prepetition Challenged Transactions involving the Debtors, including the claims asserted in complaints that various creditors filed before the Petition Date. Nearly all of the Challenged Transactions occurred prior to the appointment of the independent directors and the creation of the Special Governance Committee.

 

41


Beginning in August 2014, the Special Governance Committee, assisted by its advisors, issued more than 100 written requests for documents to CEC, its affiliates, and the Sponsors. The Special Governance Committee reviewed and analyzed documents relating to the Challenged Transactions as well as materials prepared by its advisors. Based on its pre-Petition Date investigation, and upon the recommendation of its advisors, the Special Governance Committee determined that it would require significant contributions from CEC and its affiliates to settle and release CEOC’s claims related to the Challenged Transactions. As a result, the Special Governance Committee negotiated for and secured significant contributions under the Prepetition RSA that it believed were sufficient to reasonably settle CEOC’s claims based on the information available at the time.

The Special Governance Committee, however, had received only 35,000 documents from CEC and the Sponsors when it had reached its preliminary conclusions in December 2014, and numerous interviews of key participants in the Challenged Transactions still needed to be scheduled. Moreover, shortly before the Prepetition RSA was executed, counsel for CEC indicated that they needed to re-review thousands of documents that were initially withheld from the Special Governance Committee as privileged to determine that they were in fact privileged. Because of the material outstanding information requests, the Special Governance Committee insisted that the releases of CEC and its affiliates under the RSA be contingent on the Governance Committee receiving all of the requested information and concluding at the end of the SGC Investigation that the consideration CEC and its affiliates was providing towards the Debtors’ restructuring was sufficient in light of the claims being released. The Special Governance Committee also required, as a condition to approval of the Prepetition RSA, an express “fiduciary out” that permitted the Special Governance Committee to terminate the Prepetition RSA if a superior, alternative transaction became available.

Based on the information available at the time, the Special Governance Committee’s preliminary claims assessment had a range of $1.0 billion to $2.3 billion assuming CEC and its affiliates were entitled to offsets as good faith transferees for consideration they provided to CEOC and $3.5 billion to $4.6 billion assuming no offsets. The Special Governance Committee did not have sufficient information to determine whether fraudulent transfer claims based on an actual intent to delay, hinder or defraud creditors were likely to succeed, or whether CEC or its affiliates would be entitled to offsets as good faith transferees. As contemplated in the Prepetition RSA, the Special Governance Committee continued its SGC Investigation after the Petition Date, including by conducting additional material interviews, requesting, receiving and reviewing other documentation, and analyzing potential additional claims. But additional material requests remained outstanding.

The Debtors asked the Court to appoint an Examiner in February 2015. The Special Governance Committee and its advisors kept abreast of the Examiner’s progress and reviewed the Examiner Report (as defined below), interview transcripts, and additional documents produced to the Examiner. The Special Governance Committee’s advisors reviewed a substantial number of the approximately 1 million documents produced through the Examiner investigation. In addition to the more than 25 interviews conducted as part of the SGC Investigation, the Special Governance Committee’s advisors analyzed the 74 transcripts of interviews conducted by the Examiner.

CEC and the Sponsors, however, produced tens of thousands of documents as Examiner’s Eyes Only on the grounds that they were privileged and therefore the Special Governance Committee could not see them. On December 2, 2015, the Debtors filed a motion to compel CEC to turn over documents that the Special Governance Committee believed were material to the investigation but which CEC claimed were privileged [Docket No. 2683]. The Debtors argued that because CEC and CEOC shared common outside counsel until July 2014, the Debtors were entitled to all relevant documents until CEOC was provided separate independent counsel. After the Debtors and CEC submitted their respective briefs, on January 14, 2016, the parties reached agreement on a form of protective order pursuant to which CEC agreed to turn over all of the disputed documents subject to certain conditions on the Debtors’ use of the documents. [Docket No. 2992] The Court entered the Stipulation and Agreed Protective Order that same day and subsequently entered an order withdrawing the Debtors’ motion to compel [Docket Nos. 2993, 2994]. As a result of the Debtors’ motion to compel, as well as additional document productions to the Examiner, the Debtors received more than 200,000 documents from CEC, Apollo, and TPG since the beginning of 2016. These document productions continued into March 2016. The late-produced documents were material to the Special Governance Committee’s views on various issues and materially increased the Special Governance Committee’s ranges of the value of the Estate Claims. In particular, the documents revealed numerous facts that caused the Special Governance committee to question the availability of good faith offsets and conclude that additional material claims relating to the financing transactions existed.

 

42


Likewise, the Examiner’s Final Report [Docket No. 3401] (the “Examiner Report”) further refined the Special Governance Committee’s views on various issues. The Examiner’s thorough 930-page report (plus appendices) was issued on March 15, 2016. The Special Governance Committee reviewed the Examiner’s conclusions and analysis to determine the effect, if any, on the SGC Investigation. In many instances, the Examiner Report verified the conclusions of the SGC Investigation. For some transactions, the Examiner Report provided new insights that the Special Governance Committee incorporated into the SGC Investigation.

After an independent analysis of all of the documents and interviews obtained through the SGC Investigation and the Examiner’s work, as well as a separate analysis by Kirkland & Ellis LLP of the Examiner Report, the Special Governance Committee assessed the validity of all potential Estate Claims the Debtors and/or their creditors may have against CEC or its affiliates, assessed the probability that such claims could be successfully litigated, and considered the attendant litigation, execution, and business risks associated with pursuing such claims.

Following dozens of calls and meetings between the Special Governance Committee and its advisors from mid-2014 to present, the Special Governance Committee held meetings on March 23 and 24 to assess the results of the SGC Investigation and the Examiner Report. Based on the SGC Investigation, the Special Governance Committee concluded that the Debtors’ claims related to the Challenged Transactions were worth approximately $3.2 billion to $5.2 billion assuming CEC and its affiliates were entitled to good faith offsets as part of a settlement and $3.8 billion to $5.8 billion if the good faith offset issue were actually litigated. The Special Governance Committee also asked Kirkland & Ellis LLP to further analyze the Examiner Report to adjust his headline conclusions of $3.6 billion to $5.1 billion for litigation risk and additional issues. Kirkland & Ellis LLP concluded that the Examiner’s ranges, once adjusted for litigation risk, would be $3.6 billion to $4.5 billion assuming that the value of the claims is determined at the time the assets were transferred or $4.1 billion to $5.1 billion assuming the Debtors were entitled to recover estimated reasonable appreciation that has occurred since the transfer dates. The Special Governance Committee concluded these ranges were largely consistent with each other and presented informative indicators of the potential value of the Estate Claims to the Debtors. Certain ranges considered by the Special Governance Committee relied on assessments prepared by its legal and financial advisors, while others relied solely on Kirkland & Ellis LLP’s litigation assessment applied to the Examiner’s value ranges. Because of the significant delays and costs necessary to monetize these claims and the uncertainty of the outcomes, however, the Special Governance Committee remained focused on achieving a settlement with CEC and its affiliates that fairly compensated the Debtors for these claims while allowing creditors to obtain substantial near-term recoveries now without requiring creditors to take on the risks and delays of litigation. The Special Governance Committee, with the input of its advisors, concluded that successful prosecution of these claims likely would take at least five years and likely would cost at least $100 million in attorney and expert fees to achieve a final, non-appealable judgment.

Based on its 20-month investigation, and on its careful consideration of the Examiner Report, the Special Governance Committee believes that a settlement premised on securing contributions from CEC and its affiliates is fair, reasonable, and in the best interests of the estates. As noted above, the Plan contemplates contributions from CEC and its affiliates that the Debtors estimate have a midpoint value of $4 billion. The Special Governance Committee believes this amount is well within the appropriate settlement range. See Fed. R. Bankr. P. 9019. The contribution from CEC and its affiliates contemplated by the Plan is well within ranges of values considered by the Special Governance Committee for the Estate Claims that are being released under the Plan.47 The conclusions of the SGC Investigation are set out below.

 

47  The contribution from CEC and its affiliates is not allocated between the settlement of the Estate Claims and the Third-Party Claims that are being released under the Plan. The Special Governance Committee believes that the contribution supports both releases. As described in Article VIII.B.1, below, the Second Priority Noteholders Committee disagrees and believes that the CEC’s contribution does not support either release, much less both of them. The Ad Hoc Committee of holders of 12.75% Second Lien Notes and the Ad Hoc Group of 5.75% and 6.50% Notes agree with the position of the Second Priority Noteholders Committee.

 

43


  1. The CIE Transactions

Before 2009, a CEOC subsidiary owned the World Series of Poker (“WSOP”) trademark and certain associated intellectual property (“IP”). The trade name was used to run branded, in-person poker tournaments around the United States, with the final round held at the Rio Hotel and Casino in Las Vegas. The Rio is owned by Rio Property Holding LLC and Cinderlane Inc., non-Debtor subsidiaries of CEC and CERP. The WSOP IP was associated with multiple revenue streams, including the tournaments themselves, as well as related sponsorship, media, licensing and retail businesses.

In 2009, CEOC transferred the WSOP trademark and certain intellectual property to CIE, a new CEC subsidiary created to pursue online gaming opportunities (the “CIE 2009” transaction). In exchange, CEOC received preferred shares in HIE Holdings Topco, with a stated value of $15 million, and a perpetual, royalty-free right to use the WSOP trademark and intellectual property in connection with the operation of branded, in-person poker tournaments and the sale of branded products. CEC retained Duff & Phelps, LLC (“Duff & Phelps”) to provide fairness opinions to both the CEOC and CEC Boards of Directors. Duff & Phelps valued the WSOP trademark and IP at $15 million. It also concluded that the transaction was fair from a financial point of view to CEOC, and the terms were no less favorable to CEOC than those that would have been obtained in an arm’s-length non-affiliate transaction.

In 2011, CEOC transferred the right to host the WSOP-branded poker tournaments (which was not transferred as part of the 2009 transaction). In exchange, CEC forgave $20.5 million in outstanding principal on an intercompany loan between CEC and CEOC. Following the 2011 transaction, CEC (through its majority ownership of CIE) controlled essentially all aspects of the WSOP, including the trademark, the property where the WSOP tournament finals were held, and the right to host the tournament. The transaction was approved by the CEC board of directors (the “CEC Board of Directors”). Valuation Research Corporation provided a fairness opinion to the CEC Board of Directors concluding, among other things, that the principal economic terms of the transaction were fair from a financial point of view to CEOC and the transaction was on terms that were no less favorable to CEOC than it could obtain in a comparable arm’s-length non-affiliate transaction.

The SGC Investigation concluded that with respect to the CIE 2009 transaction, it is highly likely that the Debtors could recover on a constructive fraudulent transfer claim. But other claims are unlikely to succeed given statute of limitations and other issues. With respect to the constructive fraudulent transfer claim, CEOC was insolvent at the time of the transfer, and did not receive reasonably equivalent value. The consideration shortfall for the WSOP trademark and IP transferred was approximately $54 million to $66 million. The SGC Investigation also concluded CIE is unlikely to obtain the good faith offset under section 548(c) for the value of the preferred shares of HIE Holdings Topco that CEOC received as consideration for the WSOP trademark and IP. With respect to fiduciary duty claims, there was insufficient process and inadequate governance to protect CEOC’s interests in the transaction, including no independent directors to evaluate the transaction and negotiate on CEOC’s behalf. However, breach of fiduciary duty claims are likely time-barred.

The SGC Investigation also concluded that a claim to recover any additional value of CIE is unlikely to succeed given the tenuous connection between the WSOP trademark and IP transferred and “social gaming” (which has driven most of CIE’s growth), and because of statute of limitations issues. Nonetheless, the claim would be worth pursuing because there is a good faith basis to assert it, it likely would survive a motion to dismiss and have settlement value, and further fact development may increase the overall likelihood of success.

The SGC Investigation concluded that with respect to the CIE 2011 transaction, it is highly likely that the Debtors could recover on claims for constructive fraudulent transfer. But other claims are unlikely to succeed given the statute of limitations and other issues. With respect to the constructive fraudulent transfer claim, the consideration CEC provided to CEOC in exchange for the tournament rights did not represent reasonably equivalent value, and was deficient by approximately $20 million to $54 million. The SGC Investigation likewise concluded that CIE is unlikely to obtain the good faith offset under section 548(c) for the $20.5 million it paid for the tournament rights. With respect to fiduciary duty claims, there was insufficient process and inadequate governance to protect CEOC’s interests in the transaction, including no independent directors to evaluate the transaction and negotiate on CEOC’s behalf. However, breach of fiduciary duty claims are likely time-barred.

 

44


Because the CIE assets are subject to the Debtors’ claims for fraudulent transfer and breach of fiduciary duty, the Debtors may seek the return of the CIE assets as a remedy for these claims. Accordingly, the Debtors request and expect that CAC will notify any potential buyer of CIE’s assets in writing of these claims and potential remedies. The Debtors also believe that, regardless of such notice, any potential buyer already is on notice of these claims and, if not, is hereby placed on notice of these claims. Further, although CAC contends that it is not subject to the Bankruptcy Court’s jurisdiction, the Debtors disagree and believe that CAC is subject to the Bankruptcy Court’s jurisdiction.

 

  2. The 2010 Trademark Transfer

In 2008, CEOC subsidiary Caesars License Company (“CLC” f/k/a/ Harrah’s License Company) owned the trademarks and other IP used in the Caesars network. In connection with the 2008 LBO and the spin-off of six properties to a CMBS entity that later became CERP (the “CERP Properties”), CLC licensed to the CERP Properties on an exclusive, royalty-free basis the right to use the property-specific trademarks (i.e., “Rio,” “Flamingo,” and “Paris”) in connection with the operation of those properties. CLC retained legal ownership to the trademarks and the right to use them in all other aspects of the business, such as marketing or advertising.

In 2010, the CERP Properties and the lenders amended the terms of the CMBS financing to extend the maturity of the loan. As additional protection in the event of default by CLC or foreclosure by the CMBS lenders, the lenders requested that ownership of the property-specific trademarks be transferred to the CERP Properties. Caesars agreed to assign the property-specific trademarks (i.e., trademarks, domain names, and copyrights) to the CERP Properties. The CERP Properties, in turn, provided CLC with a non-exclusive, royalty-free license to use the trademarks for any purpose other than the operation of the CERP Properties. No consideration was provided for this transfer.

Accounting memos written by both Caesars and Deloitte in late 2011 state that the trademark transfer was not intended to change the relative rights of CLC and the CERP Properties. Before and after the transfer, the CERP Properties had the exclusive, royalty-free right to use the property specific trademarks in connection with the operation of those properties and CEOC could use them in all other aspects of the business. As a result, Caesars concluded that no underlying fair market value related to the trademarks was transferred from CLC to the CERP Properties in 2010, and the only substantive change that resulted from the transfer was the protections provided to the CMBS Properties in the event of a default.

The SGC Investigation concluded that it is highly unlikely that the Debtors could recover on claims for constructive fraudulent transfer, fraudulent transfer with actual intent, breach of fiduciary duty, or aiding and abetting breach of fiduciary duty because the parties’ respective use rights in the trademarks did not change materially as a result of the transfer. In addition, fiduciary duty claims are likely time barred and there is no “golden creditor” of CLC that could extend the statute of limitations on any fraudulent transfer claim.

 

  3. The CERP Transaction

In October 2013, a CEOC subsidiary transferred to CERP the equity of Octavius Linq Intermediate Hold Co., which owned the Octavius Tower (which is the newest tower in Caesars Palace) and Project Linq (an entertainment district). In return, CEOC received approximately $80 million in cash and $53 million in CEOC notes for retirement, and CERP assumed $450 million of debt associated with these properties (these transactions collectively, the “CERP Transaction”). The transfer was done to help CEC effectuate a refinancing of debt that was obtained in connection with the 2008 LBO and secured by the six CERP Properties. Without a refinancing, this debt was set to mature in early 2015. Because of the economic downturn following the 2008 LBO, the value of the six CERP Properties had declined and was no longer sufficient to support the debt. Therefore, CEC formed CERP with the six CERP Properties and transferred the Octavius/Linq properties to CERP to provide additional collateral to close the refinancing.

CEC retained Perella to provide a reasonably equivalent value opinion to CEOC on the CERP Transaction. Perella opined that the value of the consideration CEOC received was reasonably equivalent to the value of the assets CEOC transferred.

 

45


The SGC Investigation concluded that with respect to the CERP Transaction, it is highly likely the Debtors could recover on claims for constructive fraudulent transfer and fraudulent transfer with actual intent against CEC, CERP, and Rio Properties, breach of fiduciary duty against CEOC’s directors and CEC, and aiding and abetting breach of fiduciary duty against the Sponsors (particularly Apollo). CEOC was insolvent and the consideration it received did not represent reasonably equivalent value as it was deficient by approximately $444 million. Many badges of fraud also are present, including that CEOC was insolvent; lack of reasonably equivalent value; transfer to an insider; and transfer of strategic, “crown jewel” assets. In addition, the Sponsors stood on both sides of the transaction and attempted to reduce the price paid to CEOC for the Octavius/Linq assets. The Sponsors likewise provided incomplete and/or inaccurate information to Perella, thus diminishing the relevance of its reasonably equivalent value opinion. Further, there was insufficient process and inadequate governance to protect CEOC’s interests in the transaction, including no independent directors to evaluate the transaction and negotiate on CEOC’s behalf. Finally, the SGC Investigation concluded that CERP is unlikely to obtain the good faith offset under section 548(c) for the approximately $133 million in cash and retired notes that CEOC received as consideration.

 

  4. The Growth Transaction

In mid-2012, the Sponsors began evaluating potential structures for a new Caesars entity that would acquire growth assets from CEC and CEOC, including whether the structure would be sufficiently “bankruptcy remote” to protect the assets if CEOC or CEC filed for bankruptcy. That entity became known as CGP, which is now a subsidiary of CAC. In October 2013, CEOC subsidiaries transferred the Planet Hollywood Resort & Casino in Las Vegas, CEOC’s interest in the Horseshoe Baltimore project, and 50 percent of the management fees associated with these two properties to CGP in exchange for $360 million in cash and CGP’s assumption of $513 million in debt associated with these properties (the “Growth Transaction”).

The Growth Transaction was negotiated over several months among representatives of the Sponsors and an independent Valuation Committee of CEC’s Board (the “CEC Valuation Committee”), which was formed to determine the fair market value of the assets and equity exchanged in the Growth Transaction. The CEC Valuation Committee engaged Morrison & Foerster LLP (“Morrison & Foerster”) as legal counsel and Evercore Partners LLC (“Evercore”) as its financial advisor. Evercore opined, among other things, that the consideration CEOC received in exchange for these assets was not less than the fair market value of such assets. The CEC Valuation Committee likewise concluded that the consideration paid for the assets represented fair market value.

The SGC Investigation concluded that with respect to the Growth Transaction, it is highly likely that the Debtors could recover on claims for constructive fraudulent transfer and fraudulent transfer with actual intent against CGP, and breach of fiduciary duty against the CEOC directors and CEC. It is also likely that the Debtors could recover on aiding and abetting breach of fiduciary duty claims against the Sponsors (particularly Apollo). CEOC was insolvent, and the consideration it received did not represent reasonably equivalent value as it was deficient by approximately $271 million to $635 million. Many badges of fraud also are present, including that CEOC was insolvent; lack of reasonably equivalent value; transfer to an insider; CEC and the Sponsors retained access to upside through the transaction; and the desire to move the Growth Transaction assets from the reach of creditors to a “bankruptcy remote” entity. In addition, CEC and the Sponsors did not provide Evercore with updated projections in response to Evercore’s repeated requests, which resulted in Evercore valuing the properties for less than they were worth. Finally, CEC’s contemporaneous requirement for CEOC to repay over $400 million of the CEC-CEOC intercompany revolver undermines CEC’s argument that the Growth Transaction was designed to provide CEOC with much-needed liquidity. Moreover, there was insufficient process and inadequate governance to protect CEOC’s interests in the transaction, including no independent directors to evaluate the transaction and negotiate on CEOC’s behalf. The SGC Investigation concluded that CGP is likely to obtain the good faith offset under section 548(c) for the $360 million in cash paid to CEOC because, among other reasons, CAC and CGP did not exist until the Growth Transaction closed, and it is unclear whether the Sponsors’ primary goal of gaining leverage over CEOC’s creditors in the event of a chapter 11 filing could be attributable to CGP under these circumstances.

 

  5. The Four Properties Transaction

In May 2014, CEOC transferred to CGP four casino properties (The Quad Resort and Casino (renamed the LINQ Hotel & Casino in July 2014), Bally’s Las Vegas, The Cromwell, and Harrah’s New Orleans) (collectively, the “Four Properties”) and 50 percent of the management fees payable by each casino in exchange for approximately $2.0 billion (the “Four Properties Transaction”). The final purchase price consisted of $1.815 billion of cash and CGP’s assumption of a $185 million credit facility used to renovate The Cromwell.

 

46


The Four Properties Transaction was negotiated and unanimously recommended by special committees of independent members of CEC and CAC’s Boards of Directors. The CEC Special Committee engaged Centerview Partners (“Centerview”) and Duff & Phelps as financial advisors and Reed Smith LLP (“Reed Smith”) as legal advisor. Centerview opined that (a) the purchase price was fair to CEOC from a financial point of view, and (b) the purchase price was reasonably equivalent to the value of the transferred casinos plus 50% of their management fee streams. Duff & Phelps opined that the transaction was on terms that were no less favorable to CEOC than would be obtained in a comparable arm’s-length transaction with a non-affiliate.

The SGC Investigation concluded that with respect to the Four Properties Transaction, it is highly likely that the Debtors could recover on claims for constructive fraudulent transfer and fraudulent transfer with actual intent against CGP, and breach of fiduciary duty against the CEOC Board of Directors and CEC. It is also likely the Debtors could recover for aiding and abetting breach of fiduciary duty against the Sponsors. CEOC was insolvent, and the consideration it received did not represent reasonably equivalent value as it was deficient by approximately $210 million to $930 million for the Four Properties alone. In addition, CEOC transferred undeveloped land worth approximately $109 million to $140 million to CGP as part of the Four Properties Transaction for no additional consideration.

Several badges of fraud are also present, including that CEOC was insolvent; lack of reasonably equivalent value; transfer to an insider; CEC and the Sponsors retained access to upside; and threat of suit before the transaction closed. In addition, the Sponsors planned for and designed the transaction to provide “bankruptcy remote” access to Total Rewards for CGP and CERP. The fairness opinions issued by Centerview and Duff & Phelps are not reliable because CEC provided materially lower projections to the financial advisors than its ordinary-course projections. In fact, these lower projections were used only for the fairness opinions and were not used for other purposes before or after the transaction. There was insufficient process and inadequate governance to protect CEOC’s interests in the transaction, including no independent directors to evaluate the transaction and negotiate on CEOC’s behalf. The SGC Investigation concluded that CGP is highly likely to obtain the good faith offset under section 548(c) for the $1.815 billion in cash paid to CEOC in the Four Properties Transaction because, among other reasons, a separate committee of independent CAC directors negotiated the transaction for CGP.

 

  6. The Shared Services Joint Venture

In connection with the Four Properties Transaction, CES was formed in May 2014 as a joint venture among CEOC, CERP, and CGPH to provide centralized property management services and common management of enterprise-wide intellectual property. CEOC owns 69 percent, CERP owns 20.2 percent and CGPH owns 10.8 percent of CES. Each partner has a 33 percent vote. CEOC’s primary contribution to CES was a license to certain intellectual property, including Total Rewards.

Pursuant to CES’s limited liability company agreement, the vast majority of individuals employed by CEOC and CERP, or their respective subsidiaries, were transferred to CES, and all employment-related obligations associated with these employees were assigned to CES. In addition, the Omnibus Agreement assigned to CES certain duties that CEOC and its subsidiaries historically had performed, such as managing, on a reimbursable basis, the payroll and accounts payable for CEOC, CERP, and CGP and their predecessor entities. Finally, CEOC granted to CES a license to certain intellectual property, including Total Rewards, which CES then licenses to other entities in the Caesars enterprise.

The CEC Special Committee, established for the Four Properties Transaction, approved the terms of the Shared Services Joint Venture, which Duff & Phelps opined were no less favorable to CEOC than would be obtained in a comparable arms-length transaction with a non-affiliate. A CEC ad hoc committee ultimately recommended that the CEC Board of Directors approve the CES Amended and Restated Limited Liability Company Agreement, as well as the Omnibus Agreement. The CEC and CEOC Boards of Directors approved the agreements by unanimous written consents.

 

47


The SGC Investigation concluded that with respect to CES, it is highly likely that the Debtors could recover on claims for constructive fraudulent transfer and fraudulent transfer with actual intent against CES and CGP and breach of fiduciary duty against CEOC’s Directors and CEC. It is also likely the Debtors could recover for aiding and abetting breach of fiduciary duty against the Sponsors. The SGC Investigation concluded that the value range for claims arising out of the creation of CES is $0 to $200 million.

 

  7. The B-7 Refinancing

On May 6, 2014, CEC and CEOC announced a financing plan that, according to CEC, was designed to extend CEOC’s near-term maturities and provide it with covenant relief (the “B-7 Refinancing”). Among other things, the B-7 Refinancing included the following components:

 

    Certain of the First Lien Lenders provided an additional $1.75 billion to CEOC under the Prepetition Credit Agreement through the B-7 term loan (the “B-7 Term Loan”);

 

    CEC sold 5 percent (68.1 shares) of CEOC’s outstanding common shares to institutional investors unaffiliated with CEC for $6.15 million; and

 

    The Prepetition Credit Agreement was amended to: (a) relax certain financial covenants; (b) make CEC’s guarantee of the Prepetition Credit Agreement obligations a guarantee of collection rather than of payment; and (c) cap the amount of debt that could be guaranteed to the amount outstanding under the Prepetition Credit Agreement plus approximately $2.9 billion of additional indebtedness.

On July 25, 2014, the B-7 Term Loan was assumed by CEOC after regulatory approvals were obtained and the Prepetition Credit Agreement amendments became effective. CEOC used the proceeds of the B-7 Term Loan to retire (a) 98 percent of the $214.8 million in aggregate principal amount of the 10.00% Second-Priority Senior Secured Notes due 2015 issued pursuant to that certain Indenture, dated as of December 24, 2008, by and between CEOC, CEC, and the applicable 10.00% Second Lien Notes Indenture Trustee; (b) 99.1 percent of the $792 million in aggregate principal amount of 5.625% Senior Unsecured Notes due 2015 issued pursuant to that certain Indenture, dated as of May 27, 2005, by and between CEOC, CEC, and U.S. Bank as Trustee, as supplemented from time to time; and (c) 100 percent of the $29 million in aggregate principal amount of the applicable term loans under the Prepetition Credit Agreement that were due in 2015.

CEC’s sale of CEOC stock to the unaffiliated entities resulted in the automatic release of CEC’s guarantee of the Debtors’ obligations under the First Lien Notes, Second Lien Notes, Subsidiary-Guaranteed Notes, and Senior Unsecured Notes. The B-7 Refinancing modified CEC’s guarantee of the obligations under the Prepetition Credit Agreement from a guarantee of payment to a capped guarantee of collection.

The SGC Investigation concluded that with respect to the B-7 Refinancing, it is likely that the Debtors could recover on claims for fraudulent transfer with actual intent against CEC, CERP, and CGP, breach of fiduciary duties against the CEOC Directors and CEC, and aiding and abetting breach of fiduciary duty against the Sponsors, but that it is unlikely that the Debtors can successfully assert a claim for constructive fraudulent transfer. The Debtors likely can recover the approximately $452 million paid to affiliate CGP to purchase its 2015 notes at a premium in connection with the refinancing. Likewise, the Debtors likely can recover the $315 million in cash used to pay 2016 and 2017 maturities, which principally benefitted CEC by allowing it to convert its guarantee of payment to a guarantee of collection. The SGC Investigation concluded that it is unlikely that the Debtors could recover the $420 million paid to Chatham to purchase its 2015 notes at a premium, but that recovery on such a claim may be possible given Chatham’s role in connection with the release of the guarantee. The SGC Investigation likewise concluded that a portion of $219 million in fees for the B-7 refinancing are likely recoverable.

 

48


  8. The Senior Unsecured Notes Transaction48

On August 22, 2014, CEC and CEOC consummated the “Senior Unsecured Notes Transaction” with certain holders of CEOC’s outstanding Senior Unsecured Notes, who represented $237.8 million in aggregate principal amount of the Senior Unsecured Notes and greater than 51 percent of each series of the Senior Unsecured Notes that were then held by non-affiliates of CEC and CEOC (the “August Noteholders”). As part of the Senior Unsecured Notes Transaction, the August Noteholders sold to CEC and CEOC an aggregate principal amount of approximately $89.4 million of the 6.50% Senior Unsecured Notes Due 2016 and an aggregate principal amount of approximately $66 million of the 5.75% Senior Unsecured Notes Due 2017. In return, CEC and CEOC each paid the August Noteholders $77.7 million in cash, and CEOC also paid the August Noteholders accrued and unpaid interest in cash. CEC also contributed Senior Unsecured Notes in the aggregate principal amount of approximately $426.6 million to CEOC for cancellation. Through the Senior Unsecured Notes Transaction, CEOC reduced its outstanding indebtedness by approximately $582 million and its annual interest expense by approximately $34 million.

As part of the Senior Unsecured Notes Transaction, and with the consent of the August Noteholders, CEOC and the Senior Unsecured Notes Trustee entered into supplemental Senior Unsecured Notes indentures to remove provisions relating to CEC’s guarantee of the Senior Unsecured Notes and to modify the covenant restricting disposition of “substantially all” of CEOC’s assets so that future asset sales would be measured against CEOC’s assets as of the date of the supplemental indentures. In addition, with the consent of the August Noteholders, CEOC and the Senior Unsecured Notes Indenture Trustee amended the Senior Unsecured Notes Indentures to modify a ratable amount of the approximately $82.4 million face amount of the 6.50% Senior Unsecured Notes Due 2016 and 5.75% Senior Unsecured Notes Due 2015 (the “Amended Senior Unsecured Notes”) held by the August Noteholders to include provisions that holders of those two series of the Amended Senior Unsecured Notes will be deemed to consent to any restructuring of the Senior Unsecured Notes (including the Amended Senior Unsecured Notes) that has been consented to by holders of at least 10 percent of the outstanding 6.50% Senior Unsecured Notes Due 2016 and 5.75% Senior Unsecured Notes Due 2015, as applicable.

The SGC Investigation concluded that with respect to the Senior Unsecured Notes Transaction, it is unlikely that the Debtors possess any viable claim. Unlike the other transactions, CEOC had independent directors (through the Special Governance Committee) and advisors (Kirkland & Ellis LLP), which negotiated the deal on behalf of CEOC and its stakeholders. Accordingly, as the Examiner concluded, this transaction reflects the valid exercise of the Debtors’ business judgment.

 

  9. The Intercompany Revolver

In 2008, CEC and CEOC established an unsecured revolving credit facility in favor of CEOC. As of late 2012, CEC converted the revolver from a committed to uncommitted facility, required CEOC to make solvency representations to further access the revolver, and did not lend any additional funds to CEOC. Despite the fact that no payments were due until November 2017 (following an amendment in November 2012, which extended the maturity date from January 2014), CEOC repaid more than $409 million in 2012 and 2013. The majority of these proceeds were used to buy back CMBS Debt at a discount and to provide cash for the CERP Properties. In May 2014, the Sponsors requested repayment of the remaining amount of principal and interest outstanding under the revolver ($262 million).

The SGC Investigation concluded that with respect to the $289 million in payments the Debtors made within one year of their bankruptcy filing, the Debtors were highly likely to recover these payments from CEC as avoidable preferences. The SGC Investigation also concluded it is likely that the Debtors could succeed on claims for fraudulent transfer with actual intent against CEC and CERP, breach of fiduciary duty against CEOC’s directors and CEC, and aiding and abetting breach of fiduciary duty against the Sponsors to recover $373 million (the balance of the $662.5 million CEOC repaid net of the $289 million preference) since mid-2012. Finally, the SGC Investigation concluded that it is unlikely the Debtors could succeed on a recharacterization and illegal dividends claim.

 

48 

Certain other parties disagree with the Special Governance Committee’s analysis of this transaction, including the Ad Hoc Group of 5.75% and 6.50% Notes and Frederick Barton Danner. The specific perspective of the Ad Hoc Group of 5.75% and 6.50% Notes can be found at Article IV.G.4.

 

49


  10. Additional Investigation Transactions and Topics

Multiple Degradation. As a result of the asset transfers described above, more of CEOC’s EBITDA is derived from regional properties than from Las Vegas properties. Following the CERP Transaction, Growth Transaction, and Four Properties Transaction, the percentage of CEOC’s EBITDA derived from Las Vegas properties declined from 41 percent to 28 percent. Certain creditors have argued this shift has diminished the overall value of the CEOC enterprise beyond the consideration shortfall in the amount paid to CEOC for the assets transferred.

The SGC Investigation concluded that it is unlikely that the Debtors could recover on any legal claim relating to multiple degradation. Should the Debtors be successful in recovering the fair value of the transferred assets as described above, an additional recovery for “multiple degradation” would likely be a duplicative or double recovery.

Showboat Closure and Sale. In August 2014, CEOC closed the Showboat Atlantic City Casino in Atlantic City, New Jersey. In December 2014, CEOC sold the Showboat property to Stockton College for $18 million. The SGC Investigation concluded that with respect to the Showboat Sale and Closure, it is unlikely that the Debtors could succeed on any legal claim.

After the Showboat closure, however, the Atlantic City marketing plan focused on retaining Showboat’s customers generally (rather than directing them to CEOC-owned properties). As a result, a greater percentage of Showboat-dominant customers played at CERP properties than had done so before. CEOC thus effectively transferred its Showboat customer list to CERP without consideration at a time it was insolvent. The SGC Investigation concluded that it is likely that the Debtors could recover on a de minimis constructive fraudulent transfer claim against CERP relating to the customer list.

The Atlantic Club Transaction. In December 2013, CEOC purchased the non-gaming assets of the Atlantic Club Casino Hotel (“Atlantic Club”) located in Atlantic City, New Jersey, for approximately $15.5 million for the purpose of putting a deed restriction on the property. In May 2014, CEOC sold the Atlantic Club to TJM Properties for $15.5 million with a restriction prohibiting its use for gaming activities. The SGC Investigation concluded that with respect to the Atlantic Club Transaction, it is unlikely that the Debtors could succeed on any legal claim.

CERP/Total Rewards and Management Fees. While it was still solvent, CEOC provided management services and access to Total Rewards to the CERP Properties without compensation. CEOC continued to do so after it became insolvent. In 2010, CEOC and CERP entered into a new services agreement through which CEOC continued to provide management services and access to Total Rewards to the CERP Properties at no cost. In 2014, with the formation of CES, CEOC gave up (without compensation) access to the stream of management fees and access to Total Rewards to which it otherwise would have been entitled.

The SGC Investigation concluded that it is highly likely that CEOC could succeed on claims for constructive fraudulent transfer and fraudulent transfer with actual intent against CEC and CERP, and breach of fiduciary duty against the CEOC Directors and CEC. It is also likely that CEOC could succeed on aiding and abetting claims against the Sponsors (particularly Apollo). The services that CEOC provided to CERP for no compensation are valued at approximately $237 million for the period from 2010 to May 2014 and $133 million to $592 million for the period beginning May 2014 (although any recoveries related to the post-May 2014 period would need to be offset against the costs CEOC would incur to provide such services).

CES Allocated Costs. Before CGP was created, CEOC paid 70 percent of unallocated overhead costs and the CERP Properties paid the remaining 30 percent. With the creation of CES, indirect costs (operating expenses and annual baseline capital expenditures) were allocated between CEOC, CERP, and CGP. Following the Four Properties Transaction, CEOC’s revenues as a percentage of Caesars’ total net revenues declined from 69 percent to 65 percent. CEOC, however, continued to pay approximately 69 percent of the shared services costs.

 

50


The SGC Investigation concluded it is highly likely that CEOC could succeed on claims for constructive fraudulent transfer and fraudulent transfer with actual intent against CEC and CERP and likely that CEOC could succeed on a breach of fiduciary duty claim against the CEOC Directors and CEC for the $14.5 million it overpaid in cost allocations. It is highly unlikely that CEOC could succeed on claims for aiding and abetting breach of fiduciary duties against the Sponsors.

Tax Assets. The Special Governance Committee considered whether CEOC has any claims relating to other Caesars entities’ use of CEOC’s net operating loss (“NOL”) carryforwards or because Caesars did not have a tax sharing agreement. The SGC Investigation concluded it is likely that CEOC could succeed on a claim for constructive fraudulent transfer, unjust enrichment, or turnover against CEC relating to a $56 million 2011 tax refund that should have been provided to CEOC. It is unlikely that the Debtors could recover on a legal claim relating to the lack of a tax sharing agreement and the utilization of CEOC’s NOL carryforwards by the CEC consolidated tax group.

Sponsor Fees. The Special Governance Committee considered whether CEOC has any claims relating to sponsor fees. Because CEC reimbursed CEOC for any sponsor fees that CEOC originally paid, the SGC Investigation concluded that CEOC has no viable claims related to sponsor fees.

2008 LBO. The Special Governance Committee considered whether CEOC has any claims related to the 2008 LBO. Because CEOC was solvent at the time of the 2008 LBO, the SGC Investigation concluded that CEOC has no viable claims related to the 2008 LBO.

PIK Toggle Notes Repurchase. The Special Governance Committee considered whether CEOC has any claims relating to CEOC’s repurchasing of $17 million in PIK Toggle Notes guaranteed by CEC in December 2014. Because the transaction falls within the safe harbor under Bankruptcy Code section 546(e), the SGC Investigation concluded that CEOC has no viable claims related to the PIK Toggle Notes.

CEOC Loan to CEC. The Special Governance Committee considered whether CEOC has any claims relating to CEOC’s $235 million loan to CEC in 2009 for which CEOC incurred $5.8 million in interest expense that CEC did not reimburse. The SGC Investigation concluded it is unlikely that CEOC could recover on a claim for constructive fraudulent transfer against CEC, and highly unlikely that CEOC could recover on any other claim related to this interest expense.

Estimated Post-Transfer Appreciation. The SGC Investigation concluded that it is likely that the Debtors could recover post-transfer appreciation relating to the properties and assets transferred, because courts often credit subsequent appreciation to place the transferor in the same position as if the transfer never had occurred. The appreciation likely would be offset against money spent on improvements, pursuant to Bankruptcy Code section 550(e), to the extent profits from the property did not already exceed the transferee’s investment.

 

  E. The Examiner

On January 12, 2015, simultaneously with the commencement of the Involuntary Proceeding, the Petitioning Creditors filed in the Involuntary Proceeding the Motion for Appointment of Examiner with Access to and Authority to Disclose Privileged Materials [Docket No. 10] (the “Involuntary Proceeding Examiner Motion”).

On February 13, 2015, the Debtors filed in the Chapter 11 Cases the Debtors’ Motion for Entry of an Order (I) Appointing an Examiner and (II) Granting Related Relief [Docket No. 363] (the “Debtors’ Examiner Motion”) and on February 17, 2015, the Second Priority Noteholders Committee also filed the Motion of Official Committee of Second Priority Noteholders for Appointment of Examiner with Access to and Authority to Disclose Privileged Materials (the “Second Priority Noteholders Committee’s Examiner Motion”).

 

51


On March 12, 2015, the Bankruptcy Court entered an order granting in part and denying in part the Debtors’ Examiner Motion and the Second Priority Noteholders Committee’s Examiner Motion and directing the U.S. Trustee to appoint an examiner in the Chapter 11 Cases [Docket No. 675] (the “Examiner Order”). On March 27, 2015, the U.S. Trustee appointed Richard J. Davis as examiner (the “Examiner”) [Docket No. 1010] in accordance with the Bankruptcy Court’s Order Approving Appointment of Examiner [Docket No. 992].

To assist the Examiner in carrying out his duties under the Bankruptcy Code during the Chapter 11 Cases, the Examiner filed applications and the Bankruptcy Court entered orders for the retention of the following professionals:

 

    Winston and Strawn LLP, as counsel to the Examiner [Docket Nos. 1084, 1167];

 

    Alvarez & Marsal Global Forensic and Dispute Services, LLC, as financial advisor to the Examiner [Docket Nos. 1345, 1476]; and

 

    Luskin, Stern & Eisler LLP, as special conflicts counsel to the Examiner [Docket Nos. 1085, 1168].

On April 22, 2015, the Examiner filed the Motion of the Examiner for an Order (I) Approving Protocol and Procedures Governing Examiner Discovery, (II) Approving Establishment of a Document Depository, and (III) Granting Related Relief [Docket No. 1279] seeking to establish a protocol governing discovery sought in connection with the Examiner’s investigation of, among other things, the transactions set forth in Article III.B. On May 18, 2015, the Bankruptcy Court entered the Order (I) Approving Protocol and Procedures Governing Examiner Discovery, (II) Approving Establishment of a Document Depository, and (III) Granting Related Relief [Docket No. 1576] (the “Discovery Protocol”). On May 27, 2015, following extensive consultation with interested parties, the Examiner filed the Amended Motion of the Examiner for Entry of an Agreed Order on Interviews and Depositions by the Examiner [Docket No. 1709] to establish procedures to govern depositions and witness interviews by the Examiner. On June 25, 2015, the Bankruptcy Court entered the Agreed Order on Interview and Depositions by the Examiner [Docket No. 1831], which established the protocol governing the Examiner’s interviews and depositions (with the Discovery Protocol, the “Examiner Protocol”).

The Examiner Order directs the Examiner to investigate various transactions and potential claims belonging to the Debtors’ Estates. Although the Examiner Order does not expressly reference the 2008 LBO and certain subsequent debt issuances and refinancings (collectively, the “LBO and Financing Transactions”), the Debtors believed that the Examiner was permitted to investigate such transactions to the extent they suggest potential claims belonging to the Debtors’ Estates. To clarify this issue, the Debtors filed the Debtors’ Motion for an Order Expanding the Scope of the Examiner’s Investigation [Docket No. 1847] (the “Examiner Scope Motion”) on June 30, 2015, seeking to explicitly include the LBO and Financing Transactions within the scope of the Examiner’s investigation. The Unsecured Creditors Committee objected to the Examiner Scope Motion. After additional briefing, on August 26, 2015, the Bankruptcy Court entered an order approving the relief sought in the Examiner Scope Motion and making certain related changes to the Examiner Protocol [Docket No. 2131]. As a result, the Examiner has included the LBO and Financing Transactions, including any statute of limitations issues with respect to the foregoing, in his investigation.

The Examiner filed interim reports on May 11, 2015, June 23, 2015, August 7, 2015, September 21, 2015, November 5, 2015, December 21, 2015, and February 4, 2016, updating the Bankruptcy Court and other parties on the status of the investigation [Docket Nos. 1520, 1805, 2022, 2236, 2535, 2758, 3203]. The Examiner also met with all interested parties in December 2015 to provide preliminary views on key issues and to allow the parties to provide information in response to such views. On December 23, 2015, the Examiner filed his Motion for Order Temporarily Authorizing the Filing of the Examiner’s Report and Certain Documents under Seal and Related Procedures [Docket No. 2834]. On February 2, 2016, the Bankruptcy Court entered an order temporarily authorizing the Examiner to file a redacted report and setting forth procedures for the Examiner to publicly disclose the redacted sections [Docket No. 3187].

On March 15, 2016, the Examiner issued his final report on a partially redacted basis while he works through remaining issues regarding privilege and confidentiality asserted by parties other than the Debtors [Docket No. 3401]. The Examiner Report described the Examiner’s investigation and his findings based on that investigation. Attached as Exhibit H to the Disclosure Statement is a copy of the Examiner Report Introduction and Executive Summary.

 

52


  1. The Examiner’s Investigation

Pursuant to the Examiner Order, the Examiner investigated more than 15 prepetition transactions among CEOC and other entities controlled by CEC. These transactions occurred from 2008 through 2014.

During his investigation, the Examiner and his advisors served 55 Rule 2004 subpoenas duces tecum seeking documents from 46 parties, including the Debtors, CEC, the Sponsors, other Caesars affiliates, and many of their respective legal and financial advisors. Ultimately, the Examiner received and reviewed more than 1.2 million documents consisting of 8.8 million pages. The document productions included emails, board and committee presentations, transaction documents, fairness opinions, and valuation materials.

From September 15, 2015 through February 25, 2016, the Examiner and his advisors conducted interviews of 92 individuals, including 74 formal interviews. The Examiner also conducted 32 follow-up interviews of 28 witnesses. The Examiner read or attended every formal interview and actively participated in every interview he attended.

At various points during his investigation, the Examiner met with and received input from a number of the key parties (and their advisors) involved in the transactions and the Chapter 11 Cases, including the Debtors, CEC, the Sponsors, the two Official Committees, CAC, and the Ad Hoc Committees of First Lien Noteholders and First Lien Bank Debt. In late 2015, the Examiner made detailed presentations to each of these groups who, in turn, provided him with feedback on the preliminary views he presented. The Examiner’s financial advisors also regularly communicated with the financial advisors for the Debtors, the Official Committees, the Ad Hoc Committees of First Lien Noteholders and First Lien Bank Debt, and CEC.

 

  2. The Examiner’s Findings

The Examiner concluded that many of the transactions he investigated were structured and implemented in a manner that removed assets from CEOC to the detriment of CEOC and its creditors. As a result of these transactions, the Examiner found the Debtors have claims for constructive fraudulent transfer, fraudulent transfer with actual intent to delay, hinder or defraud creditors, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty against CEC, CGP, CIE, other Caesars affiliates, CEOC directors, the Sponsors, and certain of CEC’s directors. Because these claims vary in their likelihood of success, the Examiner assigned each claim to one of the following categories: strong, reasonable, plausible, weak, and not viable. The Examiner noted, however, that these claims “will be vigorously contested by the affected parties and all of them thus are subject to litigation risk.” The Examiner further concluded that potential damages arising from claims on which the Debtors would more likely than not be successful range from $3.6 billion to $5.1 billion. The Examiner reached the following conclusions.

The Examiner investigated the Sponsors’ 2008 LBO of Caesars but did not find any colorable bases for challenging it. This conclusion was largely based on the Examiner’s finding that CEOC was solvent at the time of the 2008 LBO and the 2008 LBO did not render CEOC insolvent.

The Examiner concluded, however, that there is a strong case that CEOC was insolvent by December 31, 2008 and remained insolvent until its bankruptcy filing. This finding was key to the Examiner’s analysis because CEOC—as an insolvent subsidiary—should have had independent directors and advisors beginning in 2009, yet none were put in place until late June 2014. Instead, the Sponsors and management took the view that Caesars was one company and no one was protecting the interests of CEOC and its stakeholders.

From late 2008 until mid-2012, the Examiner found that the Sponsors and CEC focused on transactions and activities that CEC contended were designed to create “runway” that would extend the maturity of CEOC’s debts. The Examiner investigated three transactions during this time period:

 

53


    CIE 2009. In May 2009, a CEOC subsidiary transferred to CIE (a subsidiary of CEC) certain rights in the WSOP trademarks and related intellectual property in exchange for (a) preferred shares in a holding company with a stated value of $15 million and (b) a license to continue using the WSOP trademarks and IP for limited purposes. The Examiner concluded that with respect to the CIE 2009 transaction, the Debtors have a strong constructive fraudulent transfer claim, a weak fraudulent transfer with actual intent claim, and reasonable breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims, but that the fiduciary duty based claims may be barred by the statute of limitations. The Examiner found the value of the consideration CEOC received was $54.2 million to $66.2 million less than the value of the WSOP trademark and other IP CEOC transferred to CIE. The Examiner also found that CIE may not be able to establish that it was a good faith transferee because the transfer was “orchestrated” by Caesars individuals who were acting on all sides of the transaction and who knew or should have known that CEOC was insolvent.

 

    CIE 2011. In September 2011, a CEOC subsidiary transferred the hosting rights for WSOP live tournaments to CIE for $20.5 million. The Examiner concluded that with respect to the CIE 2011 transaction, the Debtors have a strong constructive fraudulent transfer claim, a weak fraudulent transfer with actual intent claim, and reasonable breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims, but that the fiduciary duty based claims would be barred by the statute of limitations. The Examiner found the value of the consideration CEOC received was $29.8 million to $35.4 million less than the value of the tournament rights CEOC transferred to CIE. The Examiner also found that CIE may not be able to establish that it was a good faith transferee because CIE’s executives (a) orchestrated the transfer; (b) knew that the purchase price was negotiated without anyone negotiating on CEOC’s behalf; and (c) participated in artificially reducing the fee that a Las Vegas casino would pay to host WSOP tournaments, which thus reduced the consideration CEOC received for the hosting rights.

 

    2010 Trademark Transfer. In connection with the August 2010 amendment to the CMBS loan agreement, a CEOC subsidiary transferred ownership of property-specific IP (i.e., “Rio,” “Paris,” and “Flamingo”) to the CERP Properties. CEOC did not receive any consideration for the transfer. The Examiner concluded that with respect to the 2010 Trademark Transfer, the Debtors’ claims would be barred by the statute of limitations. The Examiner did not assign any value to those claims.

The Examiner further found that, beginning in late 2012, the Sponsors began to implement a strategy intended to strengthen CEC’s and the Sponsors’ position in a potential restructuring negotiation with CEOC’s creditors or in a CEC or CEOC bankruptcy. This led to a series of transactions that closed in late 2013 and early 2014. The Examiner investigated a series of transactions during this time period:

 

    The Growth Transaction. On October 21, 2013, a CEOC subsidiary transferred to CGP (a) a 100% equity interest in Planet Hollywood; (b) a 52% equity interest in the Horseshoe Baltimore joint venture; and (c) 50% of the management fees associated with each property. In exchange, CEOC received $360 million in cash. The Examiner concluded that with respect to the Growth Transaction, the Debtors have a strong constructive fraudulent transfer claim, a strong fraudulent transfer with actual intent claim, a strong breach of fiduciary duty claim, and a reasonable aiding and abetting breach of fiduciary duty claim. The Examiner found the consideration CEOC received was $437 million to $593 million less than the value of the assets CEOC transferred to CGP. The Examiner also found that it would be difficult to establish that CAC and CGP were not good faith transferees because, among other reasons, the Sponsors’ principal goal of gaining leverage over CEOC creditors in the event of a bankruptcy filing should not be attributable to CAC and CGP.

 

   

The CERP Transaction. On October 11, 2013, a CEOC subsidiary transferred the equity of Octavius Tower and Project Linq to CERP. In exchange, CEOC received $80.7 million in cash and $52.9 million in CEOC notes for retirement. CERP also assumed $450 million of debt associated with the Octavius and Linq properties. The Examiner concluded that with respect to the CERP Transaction, the Debtors have a strong constructive fraudulent transfer claim, a strong actual fraudulent transfer claim,

 

54


 

and strong breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims. The Examiner found that the consideration CEOC received was $328.5 to $426.9 million less than the value of the assets CEOC transferred to CERP. The Examiner also found that CERP may not be able to establish that it was a good faith transferee because the Sponsors—who dominated both sides of the transaction—knew or should have known that CEOC was insolvent and provided Perella (the party who provided the fairness opinion) with incomplete or inaccurate assumptions.

 

    The Four Properties Transaction. In May 2014, CEOC subsidiaries transferred to CGP 100% of their interests in the Quad, Bally’s Las Vegas, the Cromwell, and Harrah’s New Orleans. As part of this transaction, CEOC also transferred 31 acres of undeveloped land. In return, CEOC received approximately $2 billion in consideration, including $1.815 billion in cash. The Examiner concluded that with respect to the Four Properties Transaction, the Debtors have a strong constructive fraudulent transfer claim, a strong fraudulent transfer with actual intent claim, a strong breach of fiduciary duty claim, and a reasonable aiding and abetting breach of fiduciary duty claim. The Examiner found the consideration CEOC received was $701 million to $1,108 million less than the value of the assets CEOC transferred. The Examiner also found that CGP would likely be able to show that it was a good faith transferee because it had a fairness opinion from Lazard, knew that CEC had a fairness opinion from Centerview, and was told that proceeds from the transaction would be used to pay CEOC creditors.

In addition to the above transactions, the Examiner concluded that additional claims may include the following:

 

    Multiple Degradation. The Examiner found that the transfer of Las Vegas-based assets out of CEOC during 2013 and 2014 significantly altered the complexion of CEOC and transformed it into a predominantly regional gaming company. As such, if sold, CEOC would be sold at a lower EBITDA multiple than it would have commanded had it not sold the Las Vegas-based assets. The Examiner concluded that the Debtors have a reasonable claim for breach of fiduciary duty for $516 million arising out of the multiple degradation that CEOC suffered when it sold most of its Las Vegas assets and began to derive more of its EBITDA from regional properties.

 

    CMBS/CERP/Total Rewards Management Fees. The Examiner found that CEOC should have charged CERP for management fees and access to Total Rewards when CEOC entered into a new services agreement with CERP in August 2010. The Examiner also found CERP underpaid for management fees and access to Total Rewards when CES was created in 2014. Consistent with these findings, the Examiner concluded that the Debtors have a reasonable claim for breach of fiduciary duty for $237.30 million based on management fees that CEOC did not receive from CERP from September 2010 through May 20, 2014. The Examiner also concluded that the Debtors have a strong constructive fraudulent transfer claim, a strong fraudulent transfer with actual intent claim, a strong breach of fiduciary duty claim, and a reasonable aiding and abetting breach of fiduciary duty claim against CERP for $132.9 million to $592.1 million based on future management fees and access to Total Rewards arising out of the creation of CES.

 

    CES Excess Cost Allocation. The Examiner found that the allocation of shared services costs was not consistent with the net revenues between CEOC, CERP, and CGP after the Four Properties Transaction. The Examiner concluded that the Debtors have a reasonable claim for breach of fiduciary duty for $14.5 million based on CEOC’s payment of shared services costs that were not allocated consistent with Caesars’ total net revenues.

 

    Atlantic City Transaction. After CEOC closed the Showboat casino in August 2014, it effectively transferred its customer list to Harrah’s Atlantic City (a CERP property) for no consideration. The Examiner concluded that the Debtors have a strong constructive fraudulent transfer claim for $3.0 million to $7.0 million based on the customer information and other data that was transferred to Harrah’s.

 

55


    B-7 Refinancing. In May and June 2014, CEOC obtained a new $1.75 billion B-7 term loan that it used to refinance debt that was set to mature between 2015 and 2018. CEOC used $315 million of the loan proceeds to pay off 2016-2017 maturities and $452 million of the loan proceeds to pre-pay CGP for notes maturing in 2015. CEOC repurchased the debt at a premium even though it was trading at a discount at the time. The Examiner concluded that the Debtors have reasonable breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims for $315 million based on the cash CEOC paid in connection with the B-7 loan. The Examiner also concluded that the Debtors have reasonable fraudulent transfer with actual intent, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty claims for $452 million based on CEOC’s use of those proceeds from the B-7 loan to pay CGP.

 

    Intercompany Transactions. In August 2008, CEC and CEOC entered into an intercompany revolver. From the third quarter of 2012 until the second quarter of 2013, CEOC repaid over $409 million on the revolver even though it was not set to mature until 2017. On June 3, 2014, CEOC repaid the remaining balance of $261.8 million at the request of the Sponsors. The Examiner concluded that the Debtors have a reasonable fraudulent transfer with actual intent claim, reasonable breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims, and a strong preference claim for $289 million to $662.5 million arising out of payments made under the intercompany revolver.

 

    Tax Issues. CEC received a $276.6 million tax refund that is attributable to the Debtors’ net operating losses but provided CEOC with a refund of only $220.8 million. The Examiner concluded that the Debtors have a strong argument that they are entitled to the full amount of the refund and likely to succeed on a claim for the outstanding $55.8 million. The Examiner concluded that any claim based on the use of NOLs generated by CEOC by the CEC consolidated tax group would be difficult to pursue.

The Examiner investigated a number of other transactions but concluded that there were no strong or reasonable claims (or in some cases any viable claims) for constructive fraudulent transfer, fraudulent transfer with actual intent, breach of fiduciary duty, or aiding and abetting breach of fiduciary duty. These include the following:

 

    The release of CEC’s guarantee through the sale of 5% of CEOC equity and distribution of 6% of equity to employees as part of a Performance Incentive Plan.

 

    CEOC’s repurchase of $17 million of PIK Toggle Notes guaranteed by CEC in December 2014.

 

    The August 2014 Senior Unsecured Notes Transaction where CEOC and CEC purchased $155 million in CEOC notes and CEC contributed $427 million of notes to CEOC for cancellation.

 

    Easements that Debtors granted in 2011 to Flamingo, Harrah’s Imperial Palace Corporation, and Caesars Linq, LLC.

As noted above, the Examiner did not find that the Debtors had any Estate Claims on account of the Unsecured Notes Transaction. As has been noted by other parties in interest, including counsel to purported class plaintiff Frederick Barton Danner in the Danner SDNY Action, the Examiner’s Report states that the Senior Unsecured Notes Transaction “can only be described as ‘ugly’ with one group of noteholders (constituting a slight majority of the notes held by non-related parties) getting paid at a premium over market in exchange for agreeing to prejudice the remaining noteholders by eliminating the Bond Guarantee from the governing indentures.” Examiner Report at 69. As the Examiner explicitly noted, however, the “guarantee release is the subject of a pending litigation by various CEOC creditors. This Report does not address the principal issues in those cases: compliance with the Trust Indenture Act and breach of the Indenture. Instead, it focuses on whether CEOC has claims arising from the release of the guarantee.” Examiner Report at 5 n.8. As noted in Article III.D above, the Danner SDNY Action and the MeehanCombs SDNY Action remain pending as to the Unsecured Noteholders Transaction and the purported guarantee of the Unsecured Notes by CEC. No decision has been made by the District Court for the Southern District of New York at this time regarding CEC’s liability related to the purported guarantees or arising from the

 

56


Unsecured Notes Transaction with regards to any third party direct claims against CEC. Any such potential claims and causes of action against CEC would be released pursuant to the Third-Party Release proposed by the Plan. Counsel to purported class plaintiff Frederick Barton Danner in the Danner SDNY Action has informed the Debtors that, at this time, Mr. Danner plans to object to the Third-Party Release.

 

  3. Second Priority Noteholders Committee Summary of Examiner Report

On May 17, 2016, the Second Priority Noteholders Committee filed an objection to the adequacy of information provided by a previous version of the Debtors’ proposed Disclosure Statement [Docket No. 3742] (the “2L Disclosure Statement Objection”). Among other things, the Second Priority Noteholders Committee asserted that the foregoing summary of the Examiner’s findings “gives short-shrift” to the Examiner’s “damning findings” and “downplays the massive value of the causes of action available to the [Debtors’] estate[s].” Id. ¶16. The Second Priority Noteholders Committee included with its objection an alternative summary of the Examiner’s findings and requested the Bankruptcy Court to require the Debtors to replace the foregoing summary with the version produced by the Second Priority Noteholders Committee. In the interests of full disclosure, the Debtors have included the summary of the Examiner’s findings drafted by the Second Priority Noteholders Committee as Exhibit K attached hereto. As set forth in detail above, the Debtors disagree with certain of the allegations, assertions, and valuations set forth in Exhibit K (including the tone of certain comments), but have included the summary verbatim in the interests of full disclosure and transparency.

 

  F. Mesirow Financial Consulting’s Role in the SGC Investigation

As a result of an undisclosed romantic relationship between a Mesirow employee and an attorney at Jenner & Block (CEC’s local counsel), Judge Goldgar indicated at the March 16, 2016 omnibus that he had “problems” with the Debtors’ request to retain Baker Tilly as a professional under the Bankruptcy Code for further work on the SGC Investigation. Judge Goldgar stated that “while it may be that personnel from Mesirow were not tainted, I think the SGC’s investigation has been, or at the very least we can’t know.” 3/16/16 Hr’g at 19. Judge Goldgar also stated: “I think there is a problem with the SGC investigation, and I think there is a good question whether additional work on that investigation is even warranted.” Id. at 20. Judge Goldgar further stated that the declaration provided by Professor Jack Williams in support of Baker Tilly’s retention application was “insufficient to support it” and that Baker Tilly needed a declaration “from somebody else, because on this point at least, [Professor Williams] has no credibility with me.” Id. at 22. Judge Goldgar indicated that experts who intend to testify at trial do not need to be retained under section 327 of the Bankruptcy Code. Id. at 22. Therefore, although he said he was inclined to deny Baker Tilly’s application to be retained under section 327 of the Bankruptcy Code, Judge Goldgar also stated that “[i]t doesn’t stop you from using Professor Williams as an expert witness, if you want. I don’t believe, and the U.S. Trustee doesn’t believe either that this is something that is subject to Section 327.” (Id. at 33) Accordingly, the Debtors agreed to withdraw their application to retain Baker Tilly rather than have the Court deny it. (Id.) At that hearing, Judge Goldgar also indicated that he was “quite likely to deny” Mesirow’s fee application for work it had done for the SGC during the Chapter 11 Cases. Id. at 34. Mesirow subsequently withdrew its fee application. The portion of the March 16th transcript relating to Baker Tilly’s retention application is attached as Exhibit L.

The Debtors take seriously the issues raised by Judge Goldgar. The Debtors do not, however, believe that the romantic relationship or the Mesirow employee’s failure to disclose the relationship in any way taints the SGC Investigation for the following reasons

 

    Mesirow provided its first interim report to the Special Governance Committee in December 2014. At the time of that report, Mesirow’s work could not possibly have been tainted because the Debtors had not decided to file voluntary petitions in Chicago and Jenner & Block had not been retained as local counsel for CEC. Based on Mesirow’s first interim report, the Special Governance Committee’s preliminary claims assessment had a range of $1 billion to $2.3 billion assuming CEC and its affiliates were entitled to offsets as good faith transferees for consideration they provided to CEOC and $3.5 billion to $4.6 billion assuming no offsets.

 

57


    Once the Mesirow team working on the SGC Investigation and the Debtors became aware of the relationship, the Debtors and Mesirow took prompt action to ensure that none of Mesirow’s work was tainted. Mesirow promptly screened the employee involved from further work on the SGC Investigation. Professor Jack Williams, who led the Mesirow team from the outset and continues to lead the Baker Tilly team that is preparing independent analyses to support Professor Williams’ potential expert testimony at a confirmation hearing, then spent approximately 150 hours that was not billed to the Debtors personally reviewing the Mesirow employee’s work product to ensure it was not biased. Finally, Mesirow retained independent outside counsel at its own expense to investigate whether the Mesirow employee had shared any confidential information with the Jenner & Block attorney. The law firm hired a forensics team to collect all written communications between the Mesirow employee and the Jenner & Block attorney from Mesirow and from the employee’s personal email accounts, computers and cell phones (a total of 1,144 GB of data). Based on its review of the data, the law firm concluded: (1) there was no evidence that confidential information about the Debtors’ Chapter 11 Cases, Mesirow’s engagement, the Special Governance Committee, or Mesirow’s efforts on the SGC Investigation was disclosed among the Mesirow employee, the Jenner & Block attorney or the Jenner & Block law firm; and (2) there was no evidence that the Mesirow employee was influenced, biased or impacted in any way by her relationship with the Jenner & Block attorney. The law firm also reviewed Mesirow’s internal and external communications with respect to Mesirow’s retention, which included 59.5 GB of data. Based upon its document review and interviews of Mesirow employees, the law firm concluded “[t]he only [Mesirow] employee, involved in the [Caesars engagement], with knowledge of the connection/relationship between [the Mesirow employee and the Jenner & Block attorney], prior to May 13, 2015, was the [Mesirow] employee.”

 

    The U.S. Trustee, which is the portion of the U.S. Department of Justice responsible for protecting the integrity of the federal bankruptcy system, conducted a six-month investigation to determine “the nature and extent” of the connection between the Mesirow employee and Jenner & Block attorney; “who had actual knowledge of the connection; whether [Mesirow] had a disqualifying conflict of interest; whether [Mesirow] breached any fiduciary duties to the estate; and whether [Mesirow’s] work product was biased.” In response to the U.S. Trustee’s requests, Kirkland & Ellis LLP and Mesirow produced several thousand pages of documents. The U.S. Trustee also conducted “factual and legal research on its own, and maintained an on-going dialog with various parties to obtain the universe of relevant facts and documents.” In late 2015, the U.S. Trustee deposed the Mesirow employee and the Jenner & Block attorney. Based on its six-month investigation, the UST acknowledged it “has not uncovered any evidence to refute [Mesirow’s] assertion that the non-disclosure was the result of [the Mesirow employee’s] conduct alone. In other words, there are no facts to suggest that anyone at [Mesirow,] other than [the Mesirow employee], had actual knowledge of the connection until mid-May 2015.” The U.S. Trustee also found “noteworthy . . . that [the Mesirow employee] had a strong personal interest in suppressing evidence of the existence of the relationship.” The U.S. Trustee did not find that Mesirow’s work was biased in any way.

 

    Approximately 30 Mesirow and later Baker Tilly professionals have devoted approximately 12,000 hours to the SGC Investigation. These professionals have developed a deep familiarity with and expertise in the issues presented, and no evidence suggests that their judgment was in any way compromised or affected by the one Mesirow employee’s relationship with the Jenner & Block attorney.

 

    The Special Governance Committee considered a total of five ranges for the value of potential estate claims. Three of the five ranges were based solely on work performed by the Examiner and Kirkland & Ellis LLP’s assessment of that work. Neither Baker Tilly nor Mesirow had any input on those three ranges.

 

    As set forth in the chart below, the Special Governance Committee’s conclusions were comparable to, and in many instances resulted in higher value ranges than, the conclusions drawn by the independent Examiner:

 

58


Comparison of the SGC Investigation to the Examiner Report  
     SGC / K&E Litigation Investigation      Examiner Report  
     Adjusted Claims
(with offsets)
     Adjusted Claims
(with litigated offsets)
     Headline Numbers  

CIE 2009

   $ 43M – $53M       $ 50M – $60M       $ 66M – $76M   

Social Gaming

   $ 0 – $507M       $ 0 – $507M         —     

CIE 2011

   $ 16M – $43M       $ 28M – $55M       $ 50M – $56M   

CMBS TM

   $ 0       $ 0       $ 0   

CGP I

   $ 217M – $508M       $ 361M – $652M       $ 437M – $593M   

CERP

   $ 355M       $ 435M       $ 329M – $427M   

Four Prop

   $ 168M – $744M       $ 531M – $1,107M       $ 592M – $968M   

Undev. Land

   $ 87M – $112M       $ 87M – $112M       $ 109M – $140M   

CES TR

   $ 0 – $160M       $ 0 – $160M         —     

Multiple Deg

   $ 103M       $ 103M       $ 516M   

CERP/TR Fees

Historical

Future

   $

$

190M

106M – $474M

  

  

   $

$

190M

106 – $474M

  

  

   $

$

237M

133M – $592M

  

  

CES Costs

   $ 12M       $ 12M       $ 15M   

AC Cust List

   $ 2M – $6M       $ 2M – $6M       $ 3M – $7M   

B-7

   $ 707M       $ 707M       $ 767M   

Release of G’tee

   $ 0       $ 0       $ 0   

Sr Unsec Notes

   $ 0       $ 0       $ 0   

PIK Notes

   $ 3M       $ 3M       $ 0   

Sponsor Fees

   $ 0       $ 0       $ 0   

Revolver

   $ 578M       $ 578M       $ 289M – $663M   

CEOC Loan

   $ 2M       $ 2M       $ 0   

LBO

   $ 0       $ 0       $ 0   

Tax

   $ 45M       $ 45M       $ 56M   
  

 

 

    

 

 

    

 

 

 

Est. Apprec.

   $ 560M       $ 560M         —     
  

 

 

    

 

 

    

 

 

 

Total

   $

 

3,194M – $5,162M

(Midpoint: $4,178M

  

   $

 

3,800M – $5,768M

(Midpoint: $4,784M

  

   $

 

3,599M – $5,112M

(Midpoint: $4,356M

  

The Second Priority Noteholders Committee disagrees with the Debtors’ perspective on the SGC Investigation and has asked the Debtors to include the following:

The Bankruptcy Court has concluded that the financial advisor (Mesirow Financial Consulting) retained by the Special Governance Committee to assist with its analysis of the estate causes of action against CEC and other insiders had a disabling conflict of interest. Specifically, during its work for the Special Governance Committee, a lead Mesirow consultant had an affair with a lawyer representing CEC. The Bankruptcy Court found that “[s]he was having an affair that she did not disclose with counsel for the very company that her employer was investigating. She was sleeping with the enemy.” Tr. 3/16/16 at 30:13-16.

 

59


Thus, contrary to the Debtors’ assertions above regarding the independence and usefulness of the Special Governance Committee and its investigation, the Bankruptcy Court determined that the Special Governance Committee and its investigation are “tainted” because “we’ll never know” what effect the affair had on the advice given to the Special Governance Committee. Id. at 28:10-13. And “because the investigation is tainted in this way, there isn’t any point in pursuing it. It wouldn’t be sufficiently beneficial to the estate . . . .” Id. at 28:21-24. “[T]here will always be an asterisk next to this report.” Id. at 31:20.

Moreover, the Bankruptcy Court concluded that Professor Jack Williams, who the Debtors claim to have led the Mesirow team and is now preparing to serve as is preparing to serve as an expert at the confirmation hearing, “was arrogant, haughty, [and] dismissive,” “has an insufficient understanding of and appreciation for Rule 2014, Section 327, and what this whole process is about,” and simply “has no credibility with me.” Id. at 21:13-22:2.

Further, and independent of the taint associated with its reliance on a conflicted financial advisor, the Noteholder Committee believes that the Special Governance Committee was an inappropriate body for considering or negotiating a settlement of the estate claims for a number of reasons. Among other things:

 

    The members of the Special Governance Committee were appointed by many of the very defendants that the Examiner determined to be most culpable, with the apparent intent that those hand-picked members would then control the claims against the defendants who appointed them;

 

    Those same defendants have the right to remove at will all members of the CEOC board of directors, including members of the Special Governance Committee;

 

    Special committees previously appointed by those defendants presided over many of the transactions that the Examiner determined to have resulted in breaches of fiduciary duty and constructive and intentional fraudulent transfers by CEOC, making it grossly inappropriate for another “special” committee appointed by the defendants to opine on or settle the claims arising from those transactions;

 

    Before bankruptcy, the Special Governance Committee permitted the Debtors to seek a declaratory judgment in New York litigation that would have resulted in no recoveries whatsoever on estate claims that the Examiner later found to be worth between $4.0 billion and $5.1 billion;

 

    Before bankruptcy, the Special Governance Committee permitted (through action or inaction) the Debtors to transfer substantially all of their management employees to an affiliate of CEC, a transaction that the Debtors now claim has made it practically impossible for them to consummate a “standalone” plan of reorganization without CEC’s cooperation;

 

    Before and during bankruptcy, the Special Governance Committee agreed to settle the estate claims (via the various Restructuring Support Agreements) for consideration far less than the Examiner’s valuation of the claims; and

 

    Whether or not legally “independent,” at least one of the two members of the Special Governance Committee has multiple current and prior connections with Apollo and one its principals (Marc Rowan), rendering him incapable of being an impartial, independent arbiter of claims against Apollo.

 

  G. Positions of CEC, the Sponsors, the Second Priority Noteholders Committee, and the Ad Hoc Group of 5.75% and 6.50% Notes Regarding the Challenged Transactions

In an effort to provide adequate information, on March 21, 2016, the Debtors requested comments or inserts to the Disclosure Statement from key creditors and other stakeholders, including as to the Challenged Transactions. CEC and the Sponsors submitted inserts with respect to the Challenged Transactions. In addition, the

 

60


2L Disclosure Statement Objection included a discussion regarding the Challenged Transactions, which the Debtors have included in part below (and the entirety can be found in Exhibit K attached hereto). As set forth in detail above, the Debtors disagree with some or all of the positions set forth in the inserts below (including the tone of certain comments), but have included the responses verbatim in the interests of full disclosure and transparency.

 

  1. Position of CEC

CEC strongly disputes many of the findings and conclusions of the SGC Investigation and the Examiner Report. It believes it has compelling defenses to any claim the Debtors or any of their creditors may assert and is prepared to litigate any such claims vigorously. Contrary to the assertions made by the Special Governance Committee and the Examiner, the evidence shows that each of the Challenged Transactions was undertaken in good faith and was beneficial to the Debtors and their creditors; that the terms of each of the Challenged Transactions were the result of a fair and appropriate process; and that in each case the Debtors received at least—and in aggregate substantially more than—reasonably equivalent value for the assets sold or transferred.

The Challenged Transactions were part of a years’ long effort, involving more than 45 capital market transactions, to address the impact on the Debtors’ business of the 2008 financial crisis. These transactions provided the Debtors with liquidity, extended maturities, and positioned the Debtors to benefit from an expected turnaround of its business. Through these efforts, the Debtors avoided the defaults and bankruptcies that afflicted other businesses, including gaming businesses, as a result of the financial crisis. The Challenged Transactions in particular provided the Debtors with more than $2.3 billion in cash and $1 billion in debt relief, relieved it of the need to fund hundreds of millions in necessary capital expenditures, and put the Debtors in a position to pay billions of dollars in principal and interest to its creditors. Neither the Special Governance Committee nor the Examiner has suggested that the Debtors’ creditors would have been better off with an earlier bankruptcy filing.

Each of the Challenged Transactions was the result of a fair process and resulted in the receipt by the Debtors of at least reasonably equivalent value for the assets they sold. The fairness of every significant asset sale was attested to by major investment banks, and the two largest transactions were negotiated and approved by independent CEC board committees with their own independent legal and financial advisors. By selling operating assets to their affiliates, thereby keeping them in the Caesars system and providing them with continued access to the Total Rewards program, the Debtors received the highest possible sale price. Indeed, CEC believes that the purchase prices exceeded the value of the assets in aggregate by hundreds of millions of dollars. And the transactions have proved even more advantageous to the Debtors in retrospect, as the assets collectively have performed far below expectations. Finally, contrary to the assertions made by the Special Governance Committee and the Examiner, CEC believes that the Debtors were solvent at the relevant times, and is prepared to litigate that issue aggressively.

The CIE 2009 Transactions. In 2009, CEC created a new subsidiary, CIE, to pursue online real-money gaming—a business that the Debtors had neither the resources nor the expertise to pursue. CIE purchased from CEOC the rights to the WSOP trademark, which CIE intended to use to promote online poker if and when it was legalized in the United States, in exchange for a $15 million preferred note. As part of the same transaction, CIE licensed back to CEOC royalty-free the right to use the WSOP mark in CEOC’s offline operations. At the time of the 2009 CIE transactions, online real-money gaming was not legal in any jurisdiction in the United States, and CIE was expected to be a money-losing venture for an indefinite period until legalization became a reality. Two years later, in 2011, CIE purchased from CEOC the rights to host the WSOP tournaments in exchange for $20.5 million. This transaction was undertaken after CEC’s management determined that it would create operational efficiencies for the same entity to own both the WSOP trademark and the tournament hosting rights.

Each of these transactions provided CEOC with reasonably equivalent value for the assets it sold. In each of these transactions, an independent financial advisor was retained to provide a fairness opinion, addressed to CEOC, concerning the material terms of the deal. And in each case the independent advisor concluded that CEOC received fair value and that the terms of the transaction were no less fair than those CEOC could have achieved in a transaction with an unaffiliated party.

 

61


The WSOP trademark and tournament rights have generated very limited profits for CIE to date. Online real-money gaming was never legalized on a national scale, and, while a handful of states have permitted such activity, it continues to be a money-losing business for CIE. The Special Governance Committee and the Examiner fail to acknowledge this reality, and their conclusions that CEOC did not receive reasonably equivalent value rest on unrealistic assumptions concerning projected future profits from online gaming that have not been realized.

In 2011 and 2012, CIE acquired new assets that produce online “social games,” which now generate the vast majority of CIE’s revenues and earnings. As both the Special Governance Committee and the Examiner acknowledge, these social games are not connected to the underlying 2009 and 2011 transactions concerning the WSOP assets. Thus, as the Examiner concluded, any claim by CEOC to recover any additional value relating to CIE is weak and unlikely to succeed.

The CERP Transaction. The CERP Transaction provided substantial benefits to CLC, and CEC has strong defenses to any claims arising from that transaction. CERP was created in late 2013 to enable the refinancing of $4.5 billion in CMBS Debt on the six CMBS Properties set to mature less than 18 months later. A default on the CMBS Debt would have created a significant risk of foreclosure on the CMBS Properties. It would also have threatened a bankruptcy of CEC itself, which guaranteed the properties’ underlying lease obligations. A default by the CMBS borrowers and a CEC bankruptcy would, in turn, have devastated the Debtors. It would have risked the dissolution of the Caesars network and deprived the Debtors of tens of millions of dollars annually in cost-sharing payments by the CMBS Properties and continuing support from CEC. The Special Governance Committee and the Examiner improperly minimize these serious threats to the Debtors.

To avoid these threats and support the refinancing of the CMBS Debt, CEOC sold to the new CERP entity its ownership interest in the Octavius Tower at Caesars Palace, and the new Project Linq retail promenade and observation wheel. In exchange for these assets, CEOC received more than $140 million in cash and bonds and retained the benefits of its favorable cost-sharing arrangements with the CERP Properties. This was not done to hinder, delay, or defraud creditors, and was not a breach of any fiduciary duty. To the contrary, it was a sale of assets at a fair price that furthered a critical interest of CEOC. Perella, an independent, highly regarded investment bank, was retained to evaluate the fairness of the deal and assure the CEOC Board of Directors that CEOC was receiving reasonably equivalent value for the assets being sold. Perella conducted extensive diligence and, contrary to the assertions by the Special Governance Committee and the Examiner, it was provided with complete and accurate information in response to all requests. Following its diligence, Perella, as an independent advisor to CEOC, insisted that the value being provided to CEOC in the transaction be increased, and it was. Perella concluded that the consideration CEOC received was worth $230 million more than the properties it sold. In retrospect, the properties CEOC transferred have dramatically underperformed expectations, and are worth hundreds of millions of dollars less today than was thought at the time of the deal.

The CERP Transaction also was well-received by the market. Not a single CEOC creditor objected. On the contrary, substantial CEOC creditors actively participated in the refinancing negotiations and invested in the new CERP debt.

The Growth Transaction. CEC similarly has strong defenses to any claim purportedly arising from the Growth Transaction. In 2012, as CEC’s business began to stabilize and show signs of improvement, CEC determined that it was necessary to continue to invest in new developments and to refurbish existing properties. Because the Debtors did not have the capacity to fund these investments, CEC and its shareholders created a new public company, CAC., funded by a new $500 million investment by the Sponsors and an additional $700 million from its other shareholders by means of a rights offering, and launched a new joint venture with CAC, CGP. In consideration for its non-voting stake in CGP, CEC contributed two assets: its equity in CIE and a portfolio of $1 billion of CEOC debt. CGP used a portion of the funds it raised to purchase from CEOC the Planet Hollywood Resort and Casino in Las Vegas and CEOC’s interest in a new development, the Horseshoe Baltimore, for an aggregate of $360 million in cash and the assumption of $450 million in debt.

Contrary to the assertions by the Special Governance Committee, the goal of the Growth Transaction was to finance growth projects and provide additional liquidity to CEOC, not to gain leverage over CEOC’s creditors in the event of a bankruptcy (which CEC neither anticipated nor desired). The factual record as a whole, including the unequivocal testimony of every person involved in the transaction, supports this conclusion.

 

62


The Growth Transaction—including the purchase price for the two CEOC properties—was negotiated and approved by the CEC Valuation Committee consisting of CEC’s three highly experienced independent directors, assisted by independent legal counsel (Morrison & Foerster) and respected financial advisors (Evercore). The CEC Valuation Committee and its advisors engaged in a months’ long, hard-fought negotiation over the terms of the transaction, and these efforts resulted in a substantial increase in the total consideration received by CEOC. At the end of this process, the CEC Valuation Committee concluded that the consideration was fair, and Evercore provided a separate written opinion that the value received for the assets sold by CEOC was reasonably equivalent to their fair market value. Neither the Special Governance Committee nor the Examiner has identified any evidence (and there is none) that the CEC Valuation Committee did anything but aggressively negotiate for the highest possible price for the CEOC assets.

Finally, as with CERP, when the Growth Transaction was announced in April 2013 and closed in October 2013, the markets applauded the deal. Analysts praised it; financial indicators across the CEC capital structure, including CEOC debt, reacted positively; and the CAC rights offering was oversubscribed. Not one CEOC creditor lodged a complaint at the time.

For these reasons and others, CEOC and its creditors have no viable claim arising from the Growth Transaction.

The Four Properties Transaction. Following the closing of the Growth Transaction and CERP Transaction, CEC’s business performance declined sharply in late 2013. In early 2014, CEC also faced the threat of a going concern qualification from its auditors, which would have created an immediate, incurable default under CEOC’s debt agreements, and led to a costly freefall CEOC bankruptcy.

In May 2014, in an effort to avoid these threats, CEOC sold four properties to CGP in return for $2 billion in cash and assumed debt, and more than $200 million in assumed capital expenditures. As with the Growth Transaction, CEC sought to ensure that CEOC’s interests were protected and that CEOC received fair value in the deal. The transaction was negotiated and approved by a special committee of two experienced independent CEC directors, assisted by independent counsel (Reed Smith) and highly regarded financial advisors (Centerview and Duff & Phelps). The committee’s vigorous negotiations with an independent committee of the CAC board of directors resulted in an increase in cash consideration of more than $250 million for CEOC. Centerview provided the committee with a written opinion attesting to the fairness of the price CEOC received. Neither the Special Governance Committee nor the Examiner has identified any evidence to suggest that the special committee did not forcefully push to obtain the best possible price for the CEOC assets. In fact, the Examiner concededly found no evidence that CAC would have paid materially more than $2 billion, and acknowledged that CAC’s financial advisor would not have issued a fairness opinion at a materially higher price. That CEOC received top dollar from a knowledgeable buyer with the capacity to pay more is powerful evidence that it received fair value.

The conclusions of the Special Governance Committee and the Examiner that CEOC did not receive full value for these assets are based entirely on their decision to use different projections than those used by the parties to the transaction. But the original management projections used by the Special Governance Committee and the Examiner were unduly optimistic and were not a reliable basis for valuation, while the revised management projections that were actually used in the transaction reflected a far more reasonable assessment of projected performance. Indeed, the properties sold have substantially underperformed the projections used by the Special Governance Committee and the Examiner in 2014 and 2015. Were those properties valued based on their actual performance, they would be worth far less than the $2 billion that CEOC actually received in the transaction. The original and modified projections, and the reasons for the changes, were fully disclosed to and carefully analyzed by the special committee, with the assistance of its financial and legal advisors, in approving the transaction. For these reasons and others, CEOC is unlikely to prevail on any claims arising from the Four Properties Transaction.

The Shared Services Transaction. As part of the Four Properties Transaction, CAC demanded, and, after arm’s-length negotiations, the special committee agreed, that the centralized services that CEOC provided to all properties in the Caesars enterprise, including management, marketing, and access to Total Rewards, would be moved to a new entity, CES. Absent the creation of CES and the concomitant assurance of continued access to Total Rewards, there would be no sale, and CEOC would have faced default and bankruptcy. To avoid these consequences and effectuate the creation of CES, CEOC licensed Total Rewards and other intellectual property to CES, while CGP and CERP contributed more than $60 million in cash to support important system upgrades that CEOC was unable to fund.

 

63


CEOC was in no way injured by the creation of CES. On the contrary, the transaction was a necessary component of the Four Properties Transaction, and thus enabled CEOC to receive over $2 billion from that transaction. CEOC also retained ownership of its assets, including Total Rewards, continued access to Total Rewards and other management services provided by CES, and the right to continue to receive millions of dollars in annual management fees. CEOC also gained substantial cash flow benefits from no longer having to fund investments in centralized management functions, such as IT upgrades. CEOC and its creditors have no claims arising from this transaction.

The B-7 Refinancing. The B-7 Refinancing was part of CEC’s continued effort to support CEOC and provide it with the flexibility and time needed for its underlying operations to recover. As part of this transaction, CEOC raised $1.75 billion in new term loans, which it used to repay all of its outstanding debt scheduled to mature in 2015 and other debt due in 2016 and 2017. CEOC also obtained favorable amendments to its first lien credit facility, including changes to its financial covenants and the removal of a provision that made the receipt of qualified financial statements a default under that facility.

CEOC received enormous benefits from the B-7 Refinancing. As noted, the proceeds, apart from fees paid to the lenders, were used to repay approximately $1.8 billion of next maturing and other near term CEOC debt, including almost all debt maturing through the end of 2016. In addition, CEOC was facing an imminent breach of the current financial covenant on its credit facility, which would have resulted in an immediate cross-default on all of its debt and a value-destructive freefall bankruptcy. The amendment of this facility to provide additional covenant headroom and remove the going concern default trigger eliminated the risk to CEOC of future defaults under the facility, coupled with the closing of the Four Properties Transaction, put CEOC in a materially healthier financial position than it had been before the two transactions, with substantial liquidity and no maturing debt for almost two years. For these and other reasons, CEOC is unlikely to prevail on any claims arising from this transaction.

Other Issues. The Special Governance Committee and the Examiner have both indicated that certain other claims may exist against CEC and its affiliates. CEC strongly disputes the viability of such claims and believes that both the SGC Investigation and the Examiner Report are mistaken as a matter of both fact and law. Any such claims that the Debtors or creditors elect to pursue will be aggressively defended in any litigation.

 

  2. Position of the Sponsors

The Sponsors, and associated individuals, dispute the same and other conclusions reached by the SGC and the Examiner, and each of them will vigorously defend any claim asserted against them by CEOC or its creditors. They submit, among other things, that: (a) CEOC received fair and reasonably equivalent value in connection with each of the transactions discussed in this section, all of which were the product of fair processes and negotiations; (b) at all times they acted in good faith, and in accordance with any applicable fiduciary duties, in connection with the relevant transactions; and (c) they did not participate, knowingly or otherwise, in any breach of duty or fraudulent transfer. The conclusions reached by the SGC and the Examiner were based on numerous material errors. Among other things, those conclusions: (a) did not properly account for the contemporaneous analyses and opinions provided by leading investment banks such as Perella, Evercore, Centerview and Duff & Phelps; (b) were based on inaccurate assertions regarding the information available to those investment banks, the role of Sponsor representatives in providing such information and the reasons for each of the transactions at issue; (c) are premised upon, inter alia, a misreading of key documents and a fundamental misunderstanding of certain testimony; (d) depend on flawed and speculative assumptions regarding alternative transactions available to CEOC; (e) did not account for various legal defenses to the relevant claims; and (f) assuming there were any liability, were based on erroneous damage calculations.

The Sponsors and associated individuals dispute that any of them has any liability to the CEOC estate or its creditors and, in any event, believe that the value of the contributions to the Plan is significantly higher than the value of the claims being released by CEOC in exchange for those contributions.

 

64


  3. Position of the Second Priority Noteholders Committee49

Importantly, and as noted previously, the range of potential damages shown on page 80 of the Examiner Report, from $3.6 billion to $5.1 billion (which, as corrected using the Examiner’s scoring system, should be $4.0 billion to $5.1 billion), is only a starting point. The Examiner noted various categories of damages that he did not include or calculate, but as to which the Debtors are or may be entitled to recover based on the Examiner’s conclusions and applicable law. Moreover, the Examiner’s range of values relates solely to claims considered strong (a high likelihood of success) or reasonable (better than 50/50 chance of success), and as to which the Examiner actually calculated relevant damages.

In fact, the Noteholder Committee believes that the estate claims are, in the aggregate, substantially more valuable than the (as corrected) $4.0 billion to $5.1 billion range calculated by the Examiner.

Attached as Exhibit K-1 is a chart prepared by Noteholder Committee showing adjustments that it believes should be made to the Examiner’s range of damages. These adjustments, when taken into account, increase likely recoverable damages of the potential defendants to a range of $8.1 billion to $12.6 billion. In making those adjustments, the Noteholder Committee used the dollar figures and EBITDA multiples calculated by the Examiner, and focused on: (1) categories of damages not calculated by the Examiner, but as to which the estate is entitled to recover based on the Examiner’s conclusions and applicable law; (2) damages recoverable in respect of claims where the Examiner appears to have overlooked certain indisputable facts; and (3) damages resulting from a determination that defendant transferees, in particular CAC and Growth Partners, did not act in good faith.

It is important to note that Exhibit K-1 does not include CEC’s potential and significant direct liability to creditors under the Parent Guarantees, which would be released under every version of the Plan filed by the Debtors. Nor does it reflect the fact that the Noteholder Committee’s financial advisors attribute even higher value to the transferred properties than the Examiner’s professionals, and regard the Examiner’s ranges of value as conservative. Exhibit K-1 also does not account for additional causes of action or theories of recovery that may exist.

First, the categories of damages not calculated by the Examiner include the following:

 

    Lost Profits. Throughout the Report, the Examiner notes that lost profits attributable to transferred properties may be an element of recovery on fraudulent transfer claims or available as damages on claims for breach of fiduciary duty or aiding and abetting breach of fiduciary duty. (Rep. at 12-13, 20, 26, 423; Rep. Appx. 5 at 97, 137-139, 143). The Examiner, however, did not include any lost profits in his summary chart of potential damages. (Rep. at 78-79). Exhibit K-1 shows the Noteholder Committee’s estimate of the post- transfer lost profits damages resulting from four of the transactions (Four Properties, CERP, Growth, WSOP), which range from $204 million to $826 million. The high end of the range was calculated based on actual EBITDA generated for each property during the relevant time frame. The low end of the range deducts actual capital expenditures.50

 

    Value Of Transferred Properties As Of Judgment Date. Although the Examiner recognized that the estate is potentially entitled to damages that include appreciation in value of property that occurs after a fraudulent transfer, (Rep. Appx. 5 at 93), the Examiner calculated potential damages based only on the value of transferred properties as of the applicable dates of conveyance. The Noteholder Committee has calculated the difference between the value of the properties as of the date of transfer (as determined by the Examiner) and the current value (or highest intermediate value). As shown in Exhibit K-1, applying the Examiner’s multiples to the current (or high water) EBITDA for properties involved in just three of the avoidable transactions (Four Properties, CERP, Growth) increases total

 

49  The Second Priority Noteholders Committee refers to itself as the “Noteholders Committee” and the Debtors therefore have used this term in including the Second Priority Noteholders Committee’s requested language verbatim.
50  In addition, pre-judgment interest can be assessed on the lost profits at the applicable state prejudgment rate, which in Delaware is 5% plus the Federal Reserve Discount Rate. Asarco LLC v. Americas Mining Corp., 404 B.R. 150, 163 (S.D. Tex. 2009), citing Del. Code. Ann., tit. 6, § 2301(a).

 

65


 

damages by an aggregate of $546 million to $657 million. Because the current value of the properties does not take into account any excess cash generated by the properties, the value of the properties as of the judgment date is not duplicative of the profits generated by the properties between the date of the transfers and the date of judgment.

 

    Value Of CIE. The Examiner concluded that the Debtors may potentially be entitled to damages of a “significant magnitude” (Rep. at 1) if the Debtors are able to recover all or some of the value of the social gaming business of CIE. Importantly, the Examiner found that play for fun online poker was part of the CIE business plan. (Rep. at 22). The Examiner concluded that “there is a plausible argument to recover the value of CIE related to social gaming,” and that while a claim to recover the full value of CIE is “between weak and plausible,” a recovery limited to the value of CIE attributable to real-money online poker and the use of the WSOP Trademark & IP is “more plausible.” (Rep. at 284). Based on a reasonable, current valuation of CIE and adjusting for the 75.8% ownership stake that was transferred, the cost to maintain real money gaming, and the damages attributable to the WSOP trademarks and hosting rights that are already included in the Examiner’s range, the Noteholder Committee calculates an additional potential $2.3 billion in damages attributable to a remedy that includes the value of CIE.

 

    Caesars Palace Impairment From Removal Of Octavius Tower. The Examiner recognized that a “reasonable” claim exists for the adverse impact on CEOC resulting from the substitution of a lease for CEOC’s previous ownership of Octavius Tower and the resulting “hold up” right now held by CERP. (Rep. at 47). The Examiner, however, concluded that it would be “very difficult” to value that harm and did not attempt to do so. (The Examiner did conclude that the return of the Octavius tower would be an appropriate remedy. (Rep. at 494)). On Exhibit K-1, the Noteholder Committee has quantified the harm by calculating the diminution of the control premium that otherwise would be associated with the value of Caesars Palace. After considering the control premiums of comparable companies, the Noteholder Committee reduced the multiple applicable to Caesars Palace by 0.5x to 1.0x, and applied that reduction to the EBITDA generated by Caesars Palace in 2015. That calculation results in further damages that are estimated by the Noteholder Committee and its professionals to range from $157 million (using the 0.5x multiple) to $313 million (using the 1.0x multiple).

 

    Transfer To CES. The Examiner considered the harm to CEOC caused by its loss of control over Total Rewards but stated that he could not identify any “nonspeculative” way to measure damages resulting from that harm. (Rep. at 58). The Noteholder Committee has developed a methodology that it asserts is nonspeculative, again based on control premiums of companies that are comparable to CEOC. According to the Noteholder Committee, applying a control premium in the range of 10.4% to 20.9% against the estimated total equity value of CEOC yields additional damages in the range of $549 million to $1.1 billion.

 

    Disgorgement Of Fees Paid By CEOC To Conflicted Counsel. The Examiner concluded that Paul Weiss had a conflict of interest in representing both CEOC and CEC in certain of the transactions but determined that “any claim against Paul Weiss for damages would be weak” because “the evidence does not support a conclusion that Paul Weiss lawyers knowingly acted at any time to injure or prejudice CEOC or its creditors.” (Rep. at 14, 19). Whether or not that is an accurate assessment (the Noteholder Committee does not believe that it is), the Examiner apparently did not consider at least one remedy available to CEOC solely as a result of the conflict, even if other “damages” otherwise could not be established – disgorgement of fees paid by CEOC to Paul Weiss (either directly or indirectly through CEC). The Noteholder Committee estimates that during the relevant period, Paul Weiss received tens of millions of dollars in legal fees (including $6.1 million from CEOC in the ninety days prior to bankruptcy). To the extent paid by CEOC (directly or indirectly), the Noteholder Committee asserts that those amounts are recoverable. The same reasoning would apply to any amounts paid by CEOC to Friedman Kaplan, which represented both CEC and CEOC in New York state court litigation that sought a declaratory judgment that no fraudulent transfers or breaches of fiduciary duty occurred. (Rep. at 817-20).

 

66


Second, there are additional damages on claims where the Examiner did not account for indisputable facts (likely because he was not made aware of those facts). This category includes, for example, the value of the constructive fraudulent transfer claim arising from the transfer of trademarks in connection with the 2010 CMBS Refinancing. The Examiner regarded the merits of the claim as “strong,” Rep. at 31, but reduced the claim to “plausible” based on a potential statute of limitations defense. It does not appear, however, that the Examiner considered the fact that the complaint filed by WSFS in Delaware on August 4, 2014 included a fraudulent transfer claim regarding the same trademarks. Because the complaint was filed prior to the four year anniversary of the transfer, the statute of limitations is not an issue because section 544(b) of the Bankruptcy Code permits the estate to step into the shoes of WSFS as a creditor.51 The Examiner concluded that the damages resulting from the transfer of the trademarks ranged from $43 million to $123 million.

Third, the Examiner did not include additional damages that could be recovered if the transferees cannot establish their own good faith, which would entitle them to liens on the fraudulently-transferred properties (if returned) or offsets against the amount of damages claimed by the estate. With respect to the CERP transaction, the Examiner found that CEOC would have a reasonable case to assert lack of good faith, and on that basis, included an additional $129 million in the range of damages for that transfer. Rep. at 46. The Examiner found there to be a plausible case for lack of good faith in connection with the Growth transaction, which would increase damages by $360 million. Rep. at 42. The Examiner found a weak, but viable, case for lack of good faith with respect to the Four Properties transactions, which would result in an additional $1.815 billion of damages. Rep. at 61.

The Noteholder Committee believes that the case for lack of good faith as to all of the above transactions is strong or, at a minimum, reasonable. In focusing on whether the actions and knowledge of the Sponsors could be imputed to the transferees, the Examiner appears to have not given full consideration to whether the transferees were on “inquiry notice” of potential claims. Under recent Seventh Circuit law cited by the Examiner, see Rep., App. 5 at 35 n.167, a transferee does not act in good faith if it had “inquiry notice,” which the Seventh Circuit defined to be “awareness of suspicious facts that would have led a reasonable firm, acting diligently, to investigate further and by doing so discover wrongdoing.” Grede v. Bank of New York Mellon (In re Sentinel Mgmt. Grp., Inc.), 809 F.3d 958, 961 (7th Cir. 2016). The Examiner identified a number of “suspicious facts” that likely would lead to a finding of a lack of good faith. Rep. at 652. And there are other compelling and undisputed facts that do not appear to have been considered by the Examiner, such as the fact that Growth Partners received a letter on March 21, 2014 (prior to the closing) from Jones Day on behalf of second-lien noteholders asserting that the Four Properties transactions constituted a fraudulent transfer and breach of fiduciary duty. Rather than conduct any diligent investigation of the claims, as required under Sentinel, CAC instead issued a Form 8-K on March 26, 2014, just five days later, stating that “CGP strongly believes there is no merit to the Letter’s allegations and will defend itself vigorously and seek appropriate relief should any action be brought.” The Noteholder Committee submits that this response falls far short of the stringent standard for a showing of good faith established by the Seventh Circuit in Sentinel.

 

  4. Position of the Ad Hoc Group of 5.75% and 6.50% Notes52

On September 28, 2005 and June 9, 2006, respectively, Caesars Entertainment Operating Company, Inc.’s (“CEOC”) predecessor, Harrah’s Operating Company, Inc., issued (i) $750 million of 6.5% senior unsecured notes due 2016 (the “2016 Notes”) and (ii) $750 million of 5.75% senior unsecured notes due 2017 (the “2017 Notes”) (collectively, the “Senior Unsecured Notes”). The Senior Unsecured Notes were guaranteed by Caesars Entertainment Corporation’s (“CEC”) predecessor. The companies affirmatively chose to issue the Senior Unsecured Notes under a registration statement, which allowed them to sell the notes to a broad array of potential investors, including those investors (such as individual “moms and pops”) that did not qualify as “accredited investors.” Accordingly, the indentures for the Senior Unsecured Notes are governed by and subject to the Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa-77bbbb (the “Trust Indenture Act”). When issued, the Senior Unsecured Notes were investment grade.

 

51  In addition, the Examiner does not appear to have realized that Caesars License Company was and remains a pledgor of its assets under the various collateral agreements that secure CEOC’s debt, meaning that numerous creditors of CLC (“golden” or otherwise) existed then and now.
52  The Ad Hoc Group of 5.75% and 6.50% Notes provides this additional disclosure specifically regarding the Senior Unsecured Notes Transaction. The defined terms herein apply to this section only.

 

67


On August 12, 2014, CEOC and CEC entered into a private arrangement (the “Favored Noteholders Transaction”) with Aurelius Capital Management, LP, BlueCrest Capital Management (New York) LP, Angelo Gordon & Co, L.P., and Goldman Sachs & Co. (the “Favored Noteholders”), four large Wall Street players holding a slight majority of the outstanding Senior Unsecured Notes that were then held by non-affiliates of CEC and CEOC. The terms of the Favored Noteholders Transaction were memorialized in a Note Purchase and Support Agreement dated August 12, 2014 (the “Note Purchase Support Agreement”). Other holders of the Senior Unsecured Notes, including individual “retail” investors (collectively, the “Disenfranchised Noteholders”), were not permitted to participate in this transaction.

Pursuant to the Favored Noteholders Transaction, the Favored Noteholders agreed to exchange $155.4 million principal face amount of the Senior Unsecured Notes at par value for $155.4 million in cash. CEOC also paid the Favored Noteholders accrued and unpaid interest in cash on those exchanged notes, together with all legal and financial advisory fees and expenses of the Favored Noteholders. Finally, CEOC gave the Favored Noteholders new notes in exchange for any notes held by the Favored Noteholders that were not redeemed at par plus accrued interest. These new notes represented claims against CEOC only, which CEOC asserts will receive approximately 46 cents on the dollar as a recovery in the CEOC bankruptcy case.

Using CEOC’s recovery percentage of 46%, the following table summarizes the recoveries for the Favored Noteholders:

 

Notes

   Notes Held by
“Favored
Noteholders”
before August
Transaction
     Notes
Purchased at
Par from

“Favored
Noteholders”
in August
Transaction
     New Notes
Issued to
“Favored
Noteholders”
in August
Transaction
on Essentially
Same Terms
But Without
Guarantee
     Recovery on
New Notes
from
Distribution
from CEOC
assuming a
46% (i.e. 46
cents on the
dollar)
Distribution
     Aggregate
Recovery to
“Favored
Noteholders”
     Percentage
Recovery to
“Favored
Noteholders”
 

6.50% due 2016

   $ 130.2 M       $ 89.4 M       $ 40.8 M       $ 18.77 M       $ 108.17 M         83.1

5.75% due 2017

   $ 107.6 M       $ 66.0 M       $ 41.6 M       $ 19.14 M       $ 85.14 M         79.1

As part of the Favored Noteholders Transaction and in exchange for the consideration set forth above, the Favored Noteholders agreed to, among other things, the purported removal of CEC’s guarantees of the Senior Unsecured Notes. Accordingly, CEOC, CEC and The Law Debenture Trust Company of New York, as successor indenture trustee for all the noteholders, purported to amend the indentures governing the Senior Unsecured Notes to strip the guarantee provided by CEC. If the Favored Noteholders Transaction were to be given effect, the Disenfranchised Noteholders, including all the “mom and pop” retail holders, would be left with notes that had no rights to sue or collect upon the guarantees by CEC, even though they were not offered a chance to participate in the Favored Noteholders Transaction.

Some of the Disenfranchised Noteholders wrote to CEOC and CEC on August 14, 2014—more than a week before the closing of the Favored Noteholders Transaction—stating that “the proposed elimination of the Guarantee without the unanimous consent of all noteholders would constitute a clear violation of the Trust Indenture

 

68


Act.” CEOC was represented by Kirkland & Ellis LLP in this transaction, the same firm that represents CEOC as proponent of the plan. CEC was represented by Paul Weiss Rifkind Wharton and Garrison LLP (“Paul Weiss”). As the examiner found, Apollo Global Management, LLC (“Apollo”) negotiated this transaction for both CEOC and CEC. With actual knowledge about concerns over the Trust Indenture Act and with the assistance of sophisticated counsel, CEOC and CEC closed the Favored Noteholders Transaction on August 22, 2014.

The Examiner has characterized the Favored Noteholders Transaction as an “ugly transaction,” in which “one group of noteholders (constituting a slight majority of the notes held by non-related parties) [were] paid at a premium over market in exchange for agreeing to prejudice the remaining noteholders by eliminating the Bond Guarantee from the governing indentures.” Examiner’s Final Report, Vol. 1 at 69 [Docket No. 3406-1]. The Examiner summarized the Favored Noteholders Transaction as follows:

In the Examiner’s view, this was an ugly transaction. The Participating Noteholders—a small group of sophisticated investors—took advantage of the circumstances and purported differences in the indentures governing the Senior Unsecured Notes to cause CEC and CEOC to repurchase their Senior Unsecured Notes at par, which was substantially higher than the market prices available. To make matters worse, the Participating Noteholders agreed as part of the transaction to amend the indentures in ways that saddled the remaining noteholders with no Bond Guarantee and substantially diminished rights. Non-participating noteholders were neither given notice, nor the opportunity to participate in this debt buyback or to agree to the amendment to the note indentures (although the participating note holders were willing to allow others to participate). For their part, the Sponsors (Apollo in particular) negotiated this transaction on behalf of both CEC and CEOC, declined the opportunity to extend the offer to participate to all non-affiliated Senior Unsecured Noteholders, and frankly admitted during interviews that a principal, if not primary, purpose in entering into the transaction was to remove any uncertainty with respect to the release of the Bond Guarantee (as opposed to acting in the best interests of CEOC and its creditors).

Examiner’s Final Report, Vol. 14 at 824 [Docket No. 3401-13].

Following the consummation of the Favored Noteholders Transaction, certain Disenfranchised Noteholders filed suits against CEOC and CEC in the United States District Court for the Southern District of New York (the “SDNY Litigation”). Each suit seeks declarations that the Favored Noteholders Transaction: (1) violated Section 316(b) of the Trust Indenture Act of 1939; (2) breached the terms of the indentures governing the Senior Unsecured Notes; and (3) CEC’s guarantee obligations remain in place. Congress enacted Section 316(b) to prevent “[e]vasion of judicial scrutiny of the fairness of debt-readjustment plans” and to “place a check or control over the majority forcing on the minorities a debt-readjustment plan.” A3274 (1939 House Report No. 76-1016); A3337-38 (1939 Senate Report No. 76-248); A2371 (1938 House Subcommittee Hearings). These are the very rights certain Disenfranchised Noteholders are seeking to vindicate in the SDNY Litigation.

As discussed in Article V.T, the proposed Plan’s Third Party Release provides for a broad release of civil liability of certain third parties, including CEC, Apollo, Kirkland & Ellis LLP, Paul Weiss, the Special Governance Committee and others involved in the Favored Noteholders Transaction. In addition, given their role in negotiating, approving, and effectuating the Favored Noteholders Transaction, the members of the Special Governance Committee are conflicted with regard to their participation in any negotiations or settlement on behalf of CEOC whereby they seek to obtain a release of any civil liability flowing from their prepetition conduct. The Third Party Release would, if approved and given effect, release CEC from its guarantee of the Senior Unsecured Notes and moot the SDNY Litigation. Notwithstanding this release, the Plan does not provide for the Disenfranchised Noteholders to receive a recovery greater than other unsecured creditors who did not have guarantee rights against CEC.

 

69


In sum, if the Plan is confirmed and given effect, the Favored Noteholders, who are comprised of Aurelius Capital Management, LP, BlueCrest Capital Management (New York) LP, Angelo Gordon & Co, L.P., and Goldman Sachs & Co. will have received a 83.1% or 79.1% recovery, depending on the series of Senior Notes they hold, while the Disenfranchised Noteholders (including retail investors) will receive only 46% on the very same investment.

 

  H. Value of CEC Contributions

Millstein performed an analysis of the aggregate value of the contributions being made by CEC to the Estates under the Plan.53 As of May 18, 2016, Millstein estimates that the value of CEC’s contributions to the Plan is in the range of $1.9 billion to $6.3 billion, with a midpoint of $4.0 billion if Class F votes to reject the Plan, and in the range of $2.1 billion to $6.7 billion with a midpoint of $4.3 billion if Class F votes to accept the Plan. A more detailed description of the valuation range and the assumptions used by Millstein to formulate this range can be found in Exhibit C.

CEC believes the value of its contributions to the Estates is at the high end of the Millstein range and, depending on certain assumptions, exceeds Millstein’s range. Certain parties in interest, including the Ad Hoc Committee of Holders of 12.75% Second Priority Senior Secured Notes, assert that the contributions are at the low end of the range, and possibly below. The Debtors disagree and will be prepared to meet their burden to establish the value of the contributions at the confirmation hearing.

The Second Priority Noteholders Committee and Ad Hoc Committee of Holders of 12.75% Second Priority Senior Secured Notes have asserted that the contribution is inadequate because it is not entirely in cash, but instead includes, among other things, cash, securities, and credit support. The Debtors will be prepared to meet their burden on the appropriateness of the settlement at confirmation.

The Second Priority Noteholders Committee disagrees with Millstein’s perspective on the contribution and has asked the Debtors to include the following:

The Noteholder Committee disagrees with Millstein’s analysis of the aggregate value of the contributions by CEC and its affiliates to the Debtors’ estates. As set forth in greater detail in Exhibit C, the Noteholder Committee submits that the value of the contribution by CEC is below the low end of the range of value asserted by Millstein, even without taking into account the substantial value of the benefits that will be realized by CEC if the Plan were confirmed, including: 1) the release of CEC’s liabilities to third parties arising from CEC’s guaranty of more than $10 billion in debt issued by CEOC; 2) the tax savings to CEC if it remains in control of the Debtors; and 3) the right of first refusal given to CEC to operate and manage all properties acquired by PropCo. The Noteholder Committee believes that when the additional value to CEC is properly taken into account, the value of CEC’s net contribution to the Debtors and their creditors is less than $1 billion or perhaps even negative, which obviously is not adequate consideration to justify the release of potential claims belonging to the Debtors that, in the opinion of the Noteholder Committee, have a value in a range from $8.1 billion to $12.6 billion.

 

  I. The Second Lien Standing Motion

On May 13, 2016, the Second Priority Noteholders Committee filed the Motion of Noteholder Committee for Order Granting Standing to Commence, Prosecute, and Settle Claims on Behalf of the Debtors’ Estate [Docket No. 3694] (the “Second Lien Standing Motion”). The Second Lien Standing Motion seeks derivative standing to pursue claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and other claims against CEC, certain of CEC’s and CEOC’s officers and directors, the Sponsors, and others. The Second Lien Standing Motion asserts that the Special Governance Committee lacks sufficient independence to bring or compromise the

 

53  The Debtors previous Investment Banker, Perella Weinberg Partners LP (“Perella”), prepared the Debtors’ contribution analysis at the time the Debtors initially entered into the Bond RSA in December 2014.

 

70


Estate Claims. The Debtors vigorously dispute, among other things, the Second Priority Noteholders Committee’s assertions that the Special Governance Committee and the Debtors have not been faithful stewards of the Estates and will respond accordingly. On May 19, 2016, the Bankruptcy Court entered an order establishing a briefing schedule on the Second Lien Standing Motion, which culminated with a hearing on the matter on July 20, 2016. On May 23, 2016, the Second Priority Noteholders Committee issued discovery requests to seven different parties, which the Second Priority Noteholders Committee has asserted was in connection with the Second Lien Standing Motion. In connection with this discovery request, the Debtors filed an emergency motion seeking to continue the standing motion until after entry of an order confirming or denying confirmation of the Plan (or such earlier date that the Debtors cease prosecution of the Plan) or, in the alternative, to amend the briefing schedule to result in a hearing on the Second Lien Standing Motion on October 19, 2016 [Docket No. 3837] (the “Continuation Motion”). The Second Priority Noteholders Committee [Docket No. 3929] and the Ad Hoc Group of 5.75% and 6.50% Senior Unsecured Notes [Docket No. 3947] filed objections to the Continuation Motion. At a hearing on June 7, 2016, the Bankruptcy Court extended the discovery schedule and set the Second Lien Standing Motion for hearing on September 21, 2016.

 

  J. Development of the Proposed Restructuring and Plan

Before filing the Chapter 11 Cases, the Debtors worked diligently and tirelessly to reach a consensual restructuring agreement with their creditors. The initial result of these efforts was the Prepetition RSA entered into by the Debtors and a significant portion of the Debtors’ creditors on December 19, 2014. The Prepetition RSA, which is described in more detail in Article III.E above, allowed the Debtors to enter the chapter 11 process with the support of a key creditor group and locked in a baseline deal structure to facilitate further negotiations with the Debtors’ creditors during the Chapter 11 Cases. Indeed, since the Petition Date, the Debtors, through Millstein, engaged in numerous negotiations with certain holders of Claims against the Debtors in an effort to reach a mutual agreement regarding a consensual resolution of the Chapter 11 Cases. These efforts, described in further detail below, resulted in the RSAs (as defined below) which form the baseline recoveries for the proposed restructuring presented by the Plan.

 

  1. The First Lien Notes RSA

The Prepetition RSA contained various milestones that the Debtors were required to meet. Although the Debtors were unable to meet certain of these milestones during the Chapter 11 Cases, the Prepetition RSA remained effective while discussions among the parties thereto continued apace. These discussions led to certain amendments to the Prepetition RSA, which were embedded in the Fourth Amended and Restated Restructuring Support and Forbearance Agreement, dated as of July 31, 2015, and in a Fifth Amended and Restated Restructuring Support and Forbearance Agreement, dated as of October 7, 2015 (the “First Lien Notes RSA”). See Caesars Entertainment Corporation, Report on Form 8-K (October 8, 2015). The First Lien Notes RSA is supported by over 80 percent of the First Lien Noteholders (the “First Lien Consenting Noteholders”).

Pursuant to the First Lien Notes RSA, the First Lien Consenting Noteholders agreed to, among other things, support and vote their claims in favor of the “Restructuring” as described in the First Lien Notes RSA, forbear from exercising certain default-related rights and remedies under the indentures governing the First Lien Notes, and not transfer their Secured First Lien Notes Claims or Prepetition Credit Agreement Claims unless the transferee agrees to be bound by the terms of the First Lien Notes RSA. In addition, any litigation between CEOC, CEC, their respective directors, and any of the First Lien Consenting Noteholders was adjourned, stayed, and/or dismissed without prejudice after January 15, 2015, in accordance with the First Lien Notes RSA. The Debtors were required to meet or comply with various material milestones under the First Lien Notes RSA relating to the timing of filing motions with the Bankruptcy Court as well as the entry of orders with respect to certain aspects of the Chapter 11 Cases. The First Lien Consenting Noteholders have a right to terminate the First Lien Notes RSA if certain milestones are not met, as modified or amended by forbearance agreements, during the pendency of the Chapter 11 Cases. Although the Debtors have not met all such case milestones, and therefore the First Lien Consenting Noteholders have the right to terminate the First Lien Notes RSA at any time, the First Lien Notes RSA has not been terminated as of the date hereof.

 

71


Importantly, while the Plan incorporates the proposed structure contemplated by the First Lien Notes RSA as well as many of the distributions contemplated thereby, the Plan does not include all terms of the First Lien Notes RSA. The economic terms of the Plan with respect to First Lien Noteholders are materially improved as compared with those contemplated by the First Lien Notes RSA, but they are not entirely consistent with the “Restructuring” described in the First Lien Notes RSA and therefore it is possible that the First Lien Consenting Noteholders may terminate the First Lien Notes RSA or choose not to support the Plan.

The Debtors and CEC remain in negotiations with the counsel to the Ad Hoc Committee of First Lien Noteholders and certain holders of First Lien Notes Claim over the terms of a Sixth Amended and Restated Restructuring Support Agreement. Those negotiations remain ongoing as of the date hereof. If such an agreement is reached, the agreement may provide for certain modifications to the Plan, including, among other things, the following:

 

    Some amount of Additional CEC Bond Consideration may be issued to Holders of Secured First Lien Notes Claims in the event that the Holders of Second Lien Notes Claims in Class F vote as a Class to reject the Plan, subject to certain crediting against payment of the Debtors’ Available Cash remaining on the Effective Date pursuant to the Cash Collateral Order.

 

    Subject to agreed milestone extensions, the Plan may be amended to include a condition precedent to the Effective Date that the Bond RSA shall not have been terminated, which condition shall be subject to waiver by the Requisite Consenting Bond Creditors.

 

    CEC may make an additional payment to the financial advisor to the Ad Hoc Committee of First Lien Noteholders, subject to the payment being credited against the Additional CEC Bond Consideration.

It is possible that the Debtors and CEC will not reach agreement with the Ad Hoc Committee of First Lien Noteholders and the Holders of First Lien Notes Claims on a Sixth Amended and Restated Restructuring Support Agreement and none of these terms will become part of the Plan. It is also possible that these terms will be materially different if the parties ultimately reach an amended restructuring support agreement.

 

  2. The First Lien Bank RSA

At several points, both before and during the Chapter 11 Cases, the Debtors and certain Holders of Prepetition Credit Agreement Claims met to negotiate terms under which such Holders would support a consensual restructuring transaction in line with that contemplated under the Prepetition RSA. In March and April of 2015, the Debtors and CEC made substantial progress with the First Lien Consenting Bank Lenders, which led to an agreement in principle. The parties, however, were ultimately unable to finalize documentation due to a number of issues. See Caesars Entertainment Corporation, Report on Form 8-K (April 20, 2015).

By the end of summer 2015, however, the Debtors, CEC, and certain Holders of Prepetition Credit Agreement Claims (the “First Lien Consenting Bank Lenders”) reengaged and this time, in the wake of the newly amended First Lien Notes RSA, came to terms on a significant agreement. Specifically, on August 21, 2015, CEOC and CEC entered into a Restructuring Support and Forbearance Agreement (as amended from time to time, the “Bank RSA”) with the First Lien Consenting Bank Lenders. See Caesars Entertainment Corporation, Report on Form 8-K (August 24, 2015). With few exceptions, the terms of the Bank RSA are consistent with the terms of the First Lien Notes RSA.

Under the Bank RSA, the First Lien Consenting Bank Lenders agreed to, among other things, support and vote their claims in favor of the Plan, forbear from exercising certain default-related rights and remedies under the Prepetition Credit Agreement, not take any actions materially inconsistent with the Plan or the Restructuring Transactions proposed therein, and not transfer their Secured First Lien Notes Claims or Prepetition Credit Agreement Claims unless the transferee agrees to be bound by the terms of the Bank RSA. Additionally, each First Lien Consenting Bank Lender that executes the Bank RSA must sell 100 percent of its respective Prepetition Credit Agreement Claims that survive the effective date of the Plan to CEC in exchange for an amount equal to the “Purchase Price” (as defined in the Bank RSA). Such sale will include consent to the termination and release of CEC’s Guaranty and Pledge Agreement with respect to the Prepetition Credit Agreement and the termination and release of all of CEC’s obligations under the Prepetition Credit Agreement and Guaranty and Pledge Agreement.

 

72


The release and termination will become effective immediately prior to (but subject to the occurrence of) the effectiveness of the Plan (including the payment of all amounts to be distributed to Holders of Prepetition First Lien Bank Claims under the Plan) and payment of the Purchase Price.

The Bank RSA also contemplated that, on the later of (a) 10:00 a.m., prevailing Eastern Time, on September 8, 2015, and (b) the date that at least two-thirds of Holders of Prepetition Credit Agreement Claims (excluding Swap and Hedge Claims) executed the Bank RSA (or agreed to abide by its material terms), CEC was required to pay the First Lien Consenting Bank Lenders executing the Bank RSA by such date such parties’ pro rata share of a $62.5 million upfront payment. On September 4, 2015, two-thirds of First Lien Consenting Bank Lenders had executed the Bank RSA, and therefore CEC became obligated to make the payment to all First Lien Consenting Bank Lenders that executed the Bank RSA on or before 10:00 a.m., prevailing Eastern Time, on September 8, 2015. This upfront payment by CEC will be credited against the Purchase Price received by the applicable Holder in connection with a settlement among CEC, CEOC, and the First Lien Consenting Bank Lenders regarding CEC’s guarantees of collection under the Prepetition Credit Agreement.

Additionally, each First Lien Consenting Bank Lender will be entitled to receive the RSA Forbearance Fees (as defined in the First Lien Notes RSA) on account of any First Lien Bond Claims that such First Lien Consenting Bank Lender held at 11:59 p.m., prevailing Eastern Time, on January 15, 2015 (and that were still held by such First Lien Consenting Bank Lender at the time they executed the Bank RSA) as if such First Lien Consenting Bank Lender were a Forbearance Fee Party (as defined in the First Lien Notes RSA).

The Bank RSA is supported by Holders of more than 80 percent of the Prepetition Credit Agreement Claims.

Similar to the First Lien Notes RSA, the Debtors were required to meet or comply with various material milestones under the Bank RSA relating to the timing of filing motions with the Bankruptcy Court as well as the entry of orders with respect to certain aspects of the Chapter 11 Cases. The First Lien Consenting Bank Lenders have a right to terminate the Bank RSA if certain milestones are not met, as modified or amended by forbearance agreements, during the pendency of the Chapter 11 Cases. The Debtors missed certain of these case milestones during the Chapter 11 Cases, and therefore, during the mediation process, the Debtors, CEC, and the First Lien Consenting Bank Lenders engaged in negotiations regarding amendments to the Bank RSA to reaffirm the support for the Plan from the Holders of Prepetition Credit Agreement Claims.

These negotiations ultimately were successful, and on June 20, 2016, certain First Lien Consenting Bank Lenders, CEC, and CEOC agreed to amend the Bank RSA (the “Amended Bank RSA”). See Caesars Entertainment Corporation, Report on Form 8-K (June 21, 2016). Pursuant to the Amended Bank RSA, the First Lien Consenting Bank Lenders have reaffirmed their support of the restructuring contemplated by the Plan. The Amended Bank RSA went effective on June 21, 2016. See Caesars Entertainment Corporation, Report on Form 8-K (June 22, 2016). Pursuant to the Amended Bank RSA, the Debtors and CEC agreed to the following provisions:

 

    If the Effective Date of the Plan has not occurred by January 1, 2017 and the Holders of Second Lien Notes Claims vote, as a class, to accept the Plan, CEC has agreed to pay the First Lien Bank Lenders $10 million per month (earned on the first day of each month) until the earlier of the Effective Date and June 30, 2017, which amount CEC will pay to the Debtors to distribute to the Holders of all Prepetition Credit Agreement Claims.

 

    To the extent that the “Additional CEC Consideration” under the June 6, 2016, version of the Plan [Docket No. 3951] (the “June 6 Plan”) is increased, CEC will increase the amount of the Additional CEC Bank Consideration (set forth above) by a percentage equal to the amount by which the Additional CEC Consideration has been increased. Similarly, to the extent the consideration being received by the Holders of First Lien Notes Claims is increased as compared to the treatment provided to such Holders in the June 6 Plan, CEC has agreed to increase the consideration being received by the Holders of Prepetition Credit Agreement Claims by the same amount of consideration and subject to the same terms of any such increase to the Holders of First Lien Notes Claims.

 

73


    The Debtors agreed to file and prosecute a motion for, and use commercially reasonable efforts to obtain, an order that would authorize the Debtors to pre-pay $300 million in Cash to the Holders of Prepetition Credit Agreement Claims, which amount will reduce on a dollar-for-dollar basis the $705 million in Cash to be received by the Holders of Prepetition Credit Agreement Claims under the Plan.

 

    The Debtors and CEC agreed to refrain from entering into any other agreement (including a restructuring support agreement) with any ad hoc committee or group or the Official Committee of Second Priority Noteholders that includes agreement terms more favorable than the terms set forth in the Amended Bank RSA.

 

    CEC agreed to pay on the Effective Date the RSA Forbearance Fee to certain First Lien Bank Lenders on the terms and conditions set forth in the Amended Bank RSA (up to an aggregate cap of $3 million).

The Plan includes the improved recoveries to the Holders of Prepetition Credit Agreement Claims set forth in the Amended Bank RSA.

 

  3. The SGN RSA

On June 7, 2016, the Debtors and CEC reached agreement with certain Holders of the Subsidiary-Guaranteed Notes Claims on the terms of a restructuring support agreement (the “SGN RSA”). The SGN RSA was the result of several months of good-faith negotiations between CEC, CEOC, each Subsidiary Guarantor, and certain Holders of Subsidiary-Guaranteed Notes Claims regarding potential plan treatments for Subsidiary-Guaranteed Notes Claims and a global resolution of certain litigation in connection therewith, including the 1111(b) Claim Objections (as defined herein), the potential existence of significant unencumbered assets at certain of the Subsidiary Guarantors, the assertion by the Holders of Subsidiary-Guaranteed Notes Claims that such Claims are entitled to postpetition interest due to the recoveries at certain of the Subsidiary Guarantors owning such assets, with ongoing operations, or that hold Estate Claims, the rights of the Holders of Subsidiary-Guaranteed Notes Claims in a hypothetical chapter 7 liquidation, and alleged uncertainty and potential litigation related to the Subsidiary-Guaranteed Notes Intercreditor Agreement. The advisors to the Consenting First Lien Bank Lenders and the Consenting First Lien Noteholders were kept apprised of these discussions due to these intercreditor issues. The SGN RSA resolves these myriad issues among CEOC, each Subsidiary Guarantor, CEC, and Holders of Subsidiary-Guaranteed Notes Claims. Notably, however, the SGN RSA was contingent on the Holders of at least 66.67 percent of Subsidiary-Guaranteed Notes Claims agreeing to the SGN RSA on or before June 30, 2016 (which date could be extended one time for a further 30 days at the sole discretion of the Debtors and CEC). On June 21, 2016, SGN RSA was amended (the “SGN RSA Amendment”) and, as amended, became effective upon the waiver by the Debtors and CEC of the requirement that Holders of at least 66.67 percent of Subsidiary-Guaranteed Notes Claims sign the SGN RSA because, as of such date, Holders of greater than 65% percent of such Claims had executed the SGN RSA. See Caesars Entertainment Corporation, Report on Form 8-K (June 22, 2016).

The SGN RSA requires the following: (a) the allowance of Subsidiary-Guaranteed Notes Claims against CEOC and each Subsidiary Guarantor in the aggregate principal amount of approximately $502 million, (b) regardless of whether holders of Subsidiary-Guaranteed Notes Claims vote to accept or reject the Plan, the distribution of $116,810,000 of New CEC Convertible Notes and OpCo Series A Preferred Stock to be exchanged pursuant to the CEOC Merger for 4.122% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise) (subject to increase based on any Improved Recovery Event (as set forth more fully herein) on account of such Allowed Subsidiary-Guaranteed Notes Claims), (c) reimbursement of the reasonable and documented fees and expenses (including advisors’ fees) of the Subsidiary-Guaranteed Notes Indenture Trustee, (d) the waiver by Holders of First Lien Notes Claims and Prepetition Credit Agreement Claims, and their respective trustees and/or agents, of the turnover provisions of the Subsidiary-Guaranteed Notes Intercreditor Agreement, and (e) the stay of the Wilmington Trust SDNY Action within five days of the effective date of the SGN RSA, the stay of the Subsidiary-Guaranteed Notes Indenture Trustee’s appeal of the 1111(b) Order (as defined herein), and the waiver of, among other things, any asserted rights by the Holders of Subsidiary-Guaranteed Notes Claims to postpetition interest on account of their Subsidiary-Guaranteed Notes Claims. The Plan incorporates the terms of the SGN RSA (through the Subsidiary-Guaranteed Notes Settlement), including the waiver by the Holders of First Lien Notes Claims and Prepetition Credit Agreement Claims, and their respective trustees and/or agents, of their rights under the turnover provisions of the Subsidiary-Guaranteed Notes Intercreditor Agreement.54

 

54  As noted in Article V.F.9, as of the date hereof, Holders of Secured First Lien Notes Claims have not agreed to waive their turnover rights, and have taken the position that the Debtors cannot direct the waiver of such rights without such Holders’ agreement.

 

74


Confirmation of the Plan shall constitute the Bankruptcy Court’s approval, pursuant to Bankruptcy Rule 9019 and section 1123 of the Bankruptcy Code, of the Subsidiary-Guaranteed Notes Settlement.

 

  4. The CEC RSA and CAC RSA

On June 7, 2016, the Debtors reached agreement with CEC on the terms of a restructuring support, settlement, and contribution agreement. The CEC RSA was the culmination of negotiations with CEC since before the commencement of these chapter 11 cases, and requires CEC to support the Plan and take all actions necessary or appropriate to consummate the Plan, including, among other things, (a) issuing the New CEC Convertible Notes, (b) issuing up to 52.7 percent of the New CEC Common Equity (including the New CEC Common Equity issuable pursuant to the New CEC Convertible Notes), (c) commencing and consummating any New CEC Capital Raise to fund New CEC’s contributions under the Plan, (d) negotiating and entering into a definitive merger agreement to effectuate the CEC–CAC Merger and obtain an agreement by the Sponsors to approve the Merger, in each case, reasonably acceptable to the Debtors by June 30, 2016, (e) purchasing 100 percent of the OpCo Common Stock for $700 million in cash and, if applicable, 5 percent of the PropCo Common Equity for $91 million, and (f) contributing and/or distributing cash as required by the Plan, including the New CEC Cash Contribution and the cash proceeds from the New CEC Capital Raise to be used to fund the consummation of the Plan. CEC may terminate the CEC RSA if, among other things, there is not a stay of the Parent Guarantee Litigation in effect at any time after June 15, 2016, the Debtors’ Disclosure Statement is not approved by June 30, 2016, the Plan is not confirmed by January 31, 2017, the Effective Date has not occurred by December 31, 2017, or the Class of Holders of either Prepetition Credit Agreement Claims or Secured First Lien Notes Claims votes to reject the Plan.

In addition, the CEC RSA also provides that either the Debtors or CEC may terminate the CEC RSA if CAC fails to execute a joinder to the CEC RSA by June 17, 2016. This condition was satisfied on June 12, 2016, when the Debtors reached agreement with CAC on the terms of a restructuring support agreement (the “CAC RSA,” and, together with the First Lien Notes RSA, the Bank RSA, the SGN RSA, and the CEC RSA, the “RSAs”). CEC also executed the CAC RSA solely to agree that it constituted a CAC joinder as required by the CEC RSA. With few exceptions, CAC’s rights and obligations under the CAC RSA are substantially similar to CEC’s rights and obligations under the CEC RSA, including with respect to CAC’s obligations to support the Plan and take all actions necessary or appropriate to consummate the Plan. Under the CAC RSA, CAC must keep the Debtors updated of the status of and any material developments with respect to potential CIE transactions and agreed to provide the Debtors written notice at least 30 days prior to the consummation of any CIE transaction. Nothing in the CAC RSA limits the Debtors’ rights to seek to protect important estate claims with respect to CIE or CIE’s assets. In addition, CAC may not independently terminate the CAC RSA if there is not a stay of the Parent Guarantee Litigation in effect at any time after June 15, 2016—they may only do so if CEC first terminates the CEC RSA.

 

  5. The Proposed Second Lien RSA

On July 20, 2015, CEOC and CEC announced a Restructuring Support and Forbearance Agreement (the “Second Lien RSA”) with Holders of a significant amount of the Second Lien Notes Claims (the “Second Lien Consenting Creditors”). The Second Lien RSA provided significantly improved recoveries—driven primarily by enhanced contributions from CEC to the Debtors’ Estates—for Holders of Second Lien Notes Claims (and potentially all Non-First Lien Claims) compared to those set forth in the Bank RSA and First Lien Notes RSA. The Second Lien RSA never became effective, however, because Holders of at least 50.1 percent of the Second Lien Notes Claims failed to execute the Second Lien RSA by September 18, 2015—the deadline to do so. Although the Second Lien RSA never became effective, the Debtors have used certain of CEC’s proposed additional contributions to the Debtors’ Estates under the Second Lien RSA as an important point of reference for CEC’s additional contributions and the enhanced creditor recoveries available under the Plan, including the New CEC Convertible Notes to be distributed to creditors pursuant to the terms of the Plan.

 

75


  6. The Debtors’ Previously Filed Plans of Reorganization

Based on these various restructuring support agreements, the Debtors have filed two prior chapter 11 plans of reorganization. The Debtors filed their original plan of reorganization on March 2, 2015 [Docket No. 555] (the “Original Plan”). The Original Plan was based on the Prepetition RSA, and largely incorporated its terms. In fact, the Original Plan was filed, in part, to meet a milestone under the Prepetition RSA and was meant to ensure that the restructuring contemplated by the Prepetition RSA would be used as a platform for negotiations during the Chapter 11 Cases. Indeed, the Debtors were in active negotiations with certain of their creditor constituents at the time of the filing of the Original Plan in an effort to strengthen support of a plan of reorganization. That platform generally revolved around a global settlement construct, which required significant contributions from CEC to support a near-term creditor recoveries and the Debtors’ business’s separation into a REIT structure—the same framework contemplated by the Plan discussed herein.

After months of arm’s-length, good-faith negotiations that resulted in the Debtors’ agreement with the Consenting First Lien Noteholders on the amendments embodied in the First Lien Notes RSA, the First Lien Bank Lenders on the terms of the Bank RSA, and with Holders of a significant amount of the Second Lien Notes Claims, the Debtors moved quickly to document the revisions to the Original Plan contemplated by these restructuring agreements. Thus, on October 7, 2015, the Debtors filed their first amended chapter 11 plan of reorganization [Docket No. 2402] (the “First Amended Plan,” and together with the Original Plan, the “Previous Plans”). The First Amended Plan was a significant achievement at the time, and it greatly improved stakeholder recoveries and ensured increased contributions from CEC to the Debtors’ Estates. In total, the First Amended Plan locked in commitments by CEC to contribute $450 million of New CEC Convertible Notes to the Debtors’ restructuring, as well as the waiver of certain recoveries CAC would otherwise be entitled and additional equity or cash contributions to the Debtors’ junior creditors.

Although the Debtors had the support of approximately $12 billion of their capital structure for the First Amended Plan, the Bankruptcy Court denied the Debtors’ request to move forward with a confirmation process for the First Amended Plan because, among other things, the Examiner had not yet issued the Examiner Report. Given these delays, the Debtors continued to negotiate and discuss plan structures with all stakeholders. These negotiations (including the restructuring support agreements described above and the agreements described below)—coupled with the results of the SGC Investigation—have resulted in the currently proposed Plan.

As the most-recent negotiations unfolded during the ongoing mediation process, the Debtors filed several iteration of their currently proposed Plan. Each iteration reflected the status of negotiations among key stakeholders at the time filed. The key components of each iteration included, among other things:

 

    April 4, 2016 Version. The version of the Plan filed on April 4, 2016, provided the framework for materially improved recoveries to the Debtors’ creditors, including increasing the face amount of New CEC Convertible Notes to be issued from $450 million to $1 million, providing for the contribution of New CEC Common Equity to certain creditors, and separate treatment for general unsecured creditors at the BIT Debtors. To facilitate the Debtors’ mediation process, however, and at the request of several parties to the mediation and at the strong recommendation of the Mediator, the Debtors agreed to temporarily file the Plan and Disclosure Statement with certain numbers, values, and exhibits omitted.

 

    May 18, 2016 Version. The version of the Plan filed on May 18, 2016, included the numbers, values, and exhibits that were previously omitted, incorporated the terms of the SGN Settlement, and provided for separate classification of unsecured creditors, based on the present status of negotiations with the Unsecured Creditors Committee. This version, however, included a potential funding gap in the event the Holders of Second Lien Claims voted to accept the Plan.

 

76


    May 27, 2016 Version. The version of the Plan filed on May 27, 2016, modified certain creditor recoveries to resolve the funding gap present in the May 18, 2016 version of the Plan. This version also noted that the Debtors were engaged in ongoing discussions with the Unsecured Creditors Committee regarding Claim classification issues related to disputed, contingent, and unliquidated Claims, as well as the creation of a potential convenience class.

 

    June 6, 2016 Version. The version of the Plan filed on June 6, 2016, provided a revised classification structure for unsecured creditors (based on the present status of negotiations with the Unsecured Creditors Committee) to account for different rights of each group of creditors, and created a convenience class of unsecured creditors that would receive only cash instead of securities.

 

    June 15, 2016 Version. The version of the Plan filed on June 15, 2016, provided information regarding the SGN RSA (including the Subsidiary Guaranteed Notes Settlement), CEC RSA, and CAC RSA, and revised the Disclosure Statement to include the terms thereof. Additionally, this version updated the classification structure for unsecured creditors (based on the present status of negotiations with the Unsecured Creditors Committee) to account for claims covered by insurance.

 

  7. Bank Guaranty Settlement Overview

As described above, the Debtors have been engaged in negotiations with certain Holders of Prepetition Credit Agreement Claims since before the Petition Date. The Holders of Prepetition Credit Agreement Claims have asserted distinct rights in the Chapter 11 Cases with respect to the Debtors’ Estates and also CEC. Specifically, the Holders of Prepetition Credit Agreement Claims have asserted that they are entitled to postpetition interest, which entitlement would depend, in part, on whether the Prepetition Credit Agreement Claims are over- or under-secured. This issue of postpetition interest affects both the Debtors and CEC due to the Guaranty and Pledge Agreement, pursuant to which CEC agreed to a guaranty of collection in favor of the Prepetition Credit Agreement Claims. Moreover, the Holders of Prepetition Credit Agreement Claims also have the ability to enforce the Subsidiary-Guaranteed Notes Intercreditor Agreement and the Second Lien Notes Intercreditor Agreement against the Holders of Subsidiary-Guaranteed Notes Claims and Second Lien Notes Claims, respectively, which has affected the Debtors’ ability to reach agreement with junior stakeholders subject to those intercreditor agreements.

Through their ongoing settlement discussions, including those related to the mediation process described in Article IV.M below, the Debtors and CEC have reached agreement with the Consenting First Lien Bank Lenders regarding these postpetition interest and intercreditor issues (the “Bank Guaranty Settlement”). Under the Bank Guaranty Settlement, which will be deemed approved by Holders of Prepetition Credit Agreement Claims through the affirmative vote of such Holders to accept the Plan, on the Effective Date, the Debtors will pay postpetition interest based on a formula set forth in the Plan (the Bank Guaranty Settlement Purchase Price) to all Holders of Prepetition Credit Agreement Claims. This payment resolves whether postpetition interest is due and whether interest is at the default or contract rate, as well as facilitates the release of the Guaranty and Pledge Agreement and the waiver of the Holders of Prepetition Credit Agreement Claims’ turnover rights under the Subsidiary-Guaranteed Notes Intercreditor Agreement and the Second Lien Notes Intercreditor Agreement. To enable this settlement, on the Effective Date, CEC (or New CEC) shall contribute the Bank Guaranty Settlement Purchase Price to the Debtors. Confirmation of the Plan shall constitute the Bankruptcy Court’s approval, pursuant to Bankruptcy Rule 9019 and section 1123 of the Bankruptcy Code, of the Bank Guaranty Settlement

The Bank Guaranty Settlement is largely built on the economic terms of the Bank RSA but, unlike the Bank RSA, is available to all Holders of Prepetition Credit Agreement Claims and not just the Consenting First Lien Bank Lenders. The Debtors believe that the Bank Guaranty Settlement benefits the Estates because, among other things, it reduces the Debtors’ liability to the Holders of Prepetition Credit Agreement Claims for the benefit of the Debtors’ junior creditors, including the Holders of Subsidiary-Guaranteed Notes Claims and the Second Lien Notes Claims (who benefit from the waiver of their respective intercreditor agreements), without requiring additional Cash from the Estates since the Bank Guaranty Settlement Purchase Price is being contributed to the Debtors by CEC (or New CEC).

 

77


  8. Unsecured Creditors Committee Support of the Plan

Throughout the Chapter 11 Cases, the Unsecured Creditors Committee has sought to protect the rights of its varied constituents. Among other groups, the Unsecured Creditors Committee represents creditors with ongoing business relations with the Debtors and their non-Debtor Affiliates, personal injury claimants and other litigation counterparties (such as Hilton, as described more fully herein at Article IV.S.4), contract rejection counterparties, current and former employees with claims on account of the Debtors’ Deferred Compensation Plan (as defined herein and discussed more fully below) and the Supplemental Employee Retirement Plan, the National Retirement Fund (the “NRF”) and its withdrawal liability claims (as described more fully herein at Article IV.S.3), the Holders of Subsidiary-Guaranteed Notes Claims, and the Holders of the Senior Unsecured Notes Claims. Certain of these claimants not only have Claims against the Debtors, but also assert claims and Causes of Action against CEC (including on account of the Parent Guaranty Litigation).

During the Chapter 11 Cases, the Unsecured Creditors Committee has argued that its constituents are entitled to greater recoveries on account of the Estate Claims and what the Unsecured Creditors Committee asserts are substantial unencumbered assets (including the Debtors’ Cash). The Debtors have engaged in extensive discussions with the Unsecured Creditors Committee regarding its theories as to why certain of the Debtors’ assets may or may not be unencumbered and the recovery waterfall for unsecured creditors vis-à-vis other creditors in the Debtors’ capital structure. The Unsecured Creditors Committee has been clear in conversations with the Debtors and CEC that it would fight confirmation of any chapter 11 plan that did not account for the arguments raised by the Unsecured Creditors Committee. As a result of the Debtors’ and CEC’s settlement discussions with the Unsecured Creditors Committee, including those related to the mediation process described in Article IV.M below, the Unsecured Creditors Committee, the Debtors, and CEC executed a restructuring support agreement (the “UCC RSA”) on June 22, 2016. The UCC RSA provides for the following terms and conditions, including the recoveries available to unsecured creditors under the Plan:

 

    Holders of Undisputed Unsecured Claims, Disputed Unsecured Claims, Insurance Covered Unsecured Claims, Convenience Unsecured Claims, and Senior Unsecured Notes Claims will be classified separately to account for different rights of each group of creditors. Holders of Undisputed Unsecured Claims and Senior Unsecured Notes Claims will receive a recovery equal to approximately 46% (midpoint) of their Allowed Claim Amount if their respective Class votes to accept the Plan and a recovery equal to approximately 30% (midpoint) if it votes to reject the Plan.55 Holders of Disputed Unsecured Claims, Insurance Covered Unsecured Claims, and Convenience Unsecured Claims will receive a recovery equal to approximately 46% (midpoint).56

 

    Holders of Undisputed Unsecured Claims, Disputed Unsecured Claims, Insurance Covered Unsecured Claims, Convenience Unsecured Claims, and Senior Unsecured Notes Claims will be granted improved recoveries equal to any improved recovery percentage the Debtors, CEC, or third parties agree to provide to the Holders of Second Lien Notes Claims that are in excess of current recoveries under the proposed Plan (whether such recoveries are provided in the Plan or through some other source).

 

    Holders of Subsidiary-Guaranteed Notes Claims must be treated consistent with the SGN RSA.

 

    The NRF’s claims must be settled and all documentation related to such settlement must be in a form and substance acceptable to the NRF.

 

    The Unsecured Creditors Committee shall have an unconditional “fiduciary out” to remove its support of the Plan.

 

55  The Unsecured Creditors Committee has reserved the right to object to the Plan if the Class of Undisputed Unsecured Claims vote to reject the Plan and would therefore receive a recovery equal to approximately 30% (midpoint).
56  These recoveries are based on CEC’s valuation of the New CEC Common Equity and New CEC Convertible Notes. Under the Plan, the Debtors have estimated that the recoveries are 44% (midpoint) and 27.5% (midpoint), as applicable.

 

78


    No further changes shall be made to securities or recoveries made available to other creditors that will impair the value of securities to be received by Holders of Undisputed Unsecured Claims, Disputed Unsecured Claims, Insurance Covered Unsecured Claims, Convenience Unsecured Claims, Senior Unsecured Notes Claims, Subsidiary-Guaranteed Notes Claims, and General Unsecured Claims against the BIT Debtors.

 

    On and after the Effective Date, the Unsecured Creditors Committee (with the assistance of its attorneys and financial advisors) will monitor the claims resolution process and the distributions to Holders of Claims in Class H, Class I, Class J, Class K, and Class L on terms to be agreed upon by the Debtors, CEC, and the Unsecured Creditors Committee before the Effective Date, provided, that as consideration for carrying out all the Unsecured Creditors Committee’s post-Effective Date rights and duties, including the claims resolution process and distribution monitoring, the Reorganized Debtors shall pay the amount of $4,000,000 to the respective Unsecured Creditor Committee Members, based on the written allocations and instructions from the Unsecured Creditors Committee or one or both of its co-chairpersons, reflecting the Unsecured Creditors Committee Members’ respective agreements to incur the required costs and efforts to carry out the Unsecured Creditors Committee’s post-Effective Date rights and duties, which payment shall be made by the Reorganized Debtors at any time from the Effective Date through 365 days after the Effective Date, provided, further, that the Reorganized Debtors shall pay the Unsecured Creditors Committee’s legal and financial advisors for their reasonable and documented fees and expenses incurred in connection with the Unsecured Creditors Committee’s post-Effective Date rights and duties.

 

    On the Effective Date and subject to the effectiveness of a restructuring support agreement with the Unsecured Creditors Committee, the Debtors shall reimburse the reasonable and documented fees and expenses of the Senior Unsecured Notes Indenture Trustee (including reasonable and documented attorney’s fees and expenses) incurred in connection with the Chapter 11 Cases.

*    *    *    *    *

The Debtors have spent significant time negotiating with their creditors and CEC both before and after the commencement of the Chapter 11 Cases, which has led to the Plan. The proposed Plan calls for greatly increased CEC contributions, including $1 billion of New CEC Convertible Notes and up to another 40.9 percent of New CEC Common Equity (for a total of 53.1 percent of aggregate New CEC Common Equity available under the Plan after accounting for the potential conversion of New CEC Convertible Notes to New CEC Common Equity), each of which will be distributed to the Debtors’ creditors through the transactions contemplated by the Plan. In addition, any Holders that receive New CEC Common Equity pursuant to the Plan will have the right to participate (along with other shareholders of New CEC Common Equity after CEC and CAC consummate the Merger) in any New CEC Capital Raises (if CEC or New CEC choose to sell any New CEC Common Equity to fund New CEC’s obligations under the Plan). The proposed Plan also incorporates the Bank Guaranty Settlement reached through the Amended Bank RSA, the Subsidiary-Guaranteed Notes Settlement (supported by the SGN RSA), and the recoveries agreed to with the Unsecured Creditors Committee through the UCC RSA. The Debtors believe that the increased recoveries in the Plan as compared to the Previous Plans inures to the benefit of the Debtors’ creditors and, as discussed more fully Exhibit I, provides greater, more certain, and near-term recoveries than a standalone plan with a litigation trust. The Debtors therefore believe the restructuring contemplated by the Plan—which is built on the framework of the RSAs and Previous Plans, inclusive of certain of the terms of the Second Lien RSA, and is subject to the Marketing Process discussed more fully in Article IV.K below—is in the best interests of the Debtors’ Estates, maximizes stakeholder recoveries, secures a viable pathway to future growth, and ensures that the Debtors continue to operate on an ongoing basis for the benefit of their customers, vendors, and approximately 32,000 employees.

 

  K. Marketing Process

Shortly after commencing the Chapter 11 Cases, the Debtors informed certain parties in interest of their determination, through the Special Governance Committee, to commence a formal marketing process (the “Marketing Process”) by soliciting proposals for a potential transaction (a “Proposed Transaction”) to acquire

 

79


the Debtors and their controlled non-debtor subsidiaries in their entirety (the “Company”) through any structure approved by the Special Governance Committee, including through the acquisition of equity in the Debtors’ REIT structure to be distributed under the Plan. Although the Debtors believe that a sale of the Debtors’ reorganized equity is the most tax efficient structure, the Debtors have not precluded bids for assets, subsidiary equity interests, or any other bid structure that may maximize value for all their constituents, whether under a proposed plan of reorganization or otherwise. The following information about this Marketing Process provides Holders of Claims and Interests important information with regard to the Debtors’ efforts to maximize recoveries for all stakeholders. The Debtors, through the Special Governance Committee, approved a two-stage Marketing Process for the solicitation of third party interest in a Proposed Transaction.

 

  1. Overview

The Debtors commenced the Marketing Process in November 2015. The Debtors, working with their legal and financial advisors in consultation with representatives of the Official Committees and Ad Hoc First Lien Groups, developed a list of prospective buyers including both financial and strategic buyers. The prospective buyers were provided with: (a) a “Teaser” that contains an overview of the Debtors’ businesses based on publicly-available information; (b) a “Bid Letter” that provides the prospective buyers with an overview of the Marketing Process and the timeline and procedures related thereto; and (c) a draft “Confidentiality Agreement,” the execution of which was a prerequisite to participation in the Marketing Process. Those prospective buyers that executed the Confidentiality Agreement were also provided with a Confidential Information Memorandum regarding the Debtors’ and their non-Debtor subsidiaries’ businesses.

 

  2. Receipt of Bids; Development of Proposal

During the first phase of the two-phase Marketing Process, the Debtors invited approximately 90 parties to submit a written, non-binding preliminary proposal (a “Proposal”) with respect to a Proposed Transaction. Any such Proposal was to be submitted to the Debtors’ legal and financial advisors by January 29, 2016 (the “Proposal Deadline”). Following a robust marketing process during which the Debtors’ financial advisors actively solicited potential buyers of the Company, the Debtors ultimately received one offer to purchase the PropCo side of the business and two offers to purchase certain discrete assets, but no offers to purchase all of the Debtors or the reorganized equity in the proposed OpCo entity.

The Special Governance Committee, with the assistance of the Debtors’ legal and financial advisors, conducted a thorough analysis of these proposals, including by seeking input from the Debtors’ core creditor constituencies, including the Official Committees and Ad Hoc First Lien Groups. The Special Governance Committee determined that the one bidder seeking to purchase the PropCo assets (the “PropCo Bidder”) is an acceptable bidder for purposes of proceeding to the final round of the Marketing Process. In addition, although no party officially has submitted a bid to purchase all of the Debtors or the reorganized equity in the proposed OpCo entity, the Debtors will keep open the Marketing Process to accept such bids to ensure their ability to maximize value for all stakeholders.

If the Debtors determine, after consultation with their legal and financial advisors, that the final bid from the PropCo Bidder or another party represents or would be part of a higher or otherwise better transaction as compared with the Plan, the Debtors will, as soon as reasonably practicable and after consultation with representatives of the Official Committees and the Ad Hoc First Lien Groups, endeavor to complete and sign all agreements, contracts, instruments, or other documents evidencing and containing the terms upon which such final successful bid was made (the “Transaction Documents”). Any Proposed Transaction ultimately approved by the Debtors will be subject to all applicable requirements of the Bankruptcy Code and ultimate approval by the Bankruptcy Court, as well as gaming and regulatory approval in a variety of jurisdictions and satisfaction of any other conditions specified in the Transaction Documents.

 

  3. Fiduciary Duties and Plan Amendments

It is unclear at this time whether the Marketing Process will ultimately produce a higher or otherwise better Proposed Transaction as compared with the Restructuring Transactions contemplated by the Plan. Consistent with their fiduciary duty to maximize value for the benefit of all stakeholders, however, the Debtors reserve all rights to

 

80


amend the Plan, as necessary, to incorporate the terms of any Proposed Transaction, and, to the extent permitted by law, seek confirmation of any such Amended Plan without re-soliciting votes on such Amended Plan. The Debtors also continue to engage with potential third-party buyers who contact them through the Marketing Process regarding a Proposed Transaction. The terms of any Amended Plan may differ materially from the terms proposed herein, or may otherwise materially affect the recovery available to Holders of Claims or Interests described herein.

 

  4. Position of the Second Priority Noteholders Committee Regarding the Marketing Process

The Second Priority Noteholders Committee has asked the Debtors to include the following statement regarding their views of the Marketing Process:

The Noteholder Committee believes that the marketing process did not produce a useable market test for the interests that CEC would acquire under the Plan. As noted above, the only indications of interest received by the Debtors involved assets different from those proposed to be sold to CEC under the Plan. Those indications of interest do not provide any basis to measure the market value of the property CEC will receive under the Plan.

For another thing, the process itself was flawed. The Debtors only invited ninety parties to make non-binding preliminary proposals. Of that cherry-picked group, only 27 expressed interest sufficient even to justify sending a confidentiality agreement, which only 6 prospects even bothered to execute and return. Virtually all of the entities the Debtors deemed fit to invite into the process decided not to invest the time or effort to participate. The Noteholder Committee believes this was likely because interested parties recognized that the interests to be acquired by CEC were not truly up for sale and that bidding simply would be a waste of time and resources.

The Debtors disagree with this characterization of the Marketing Process and will be prepared to meet their burden to demonstrate the appropriateness and thoroughness of the Marketing Process during the Plan confirmation process.

 

  L. Exclusivity

Under the Bankruptcy Code, a debtor has the exclusive right to file and solicit acceptance of a plan or plans of reorganization for an initial period of 120 days from the date on which the debtor filed for voluntary relief (the “Exclusive Filing Period”). If a debtor files a plan during the Exclusive Filing Period, then the debtor has the exclusive right for 180 days from the commencement date to solicit acceptances of the Plan (the “Exclusive Solicitation Period” and, together with the Exclusive Filing Period, the “Exclusive Periods”). During the Exclusive Periods, no other party in interest may file a competing plan of reorganization. Additionally, a court may extend these periods upon the request of a party in interest. The Bankruptcy Code limits extensions of the Exclusive Filing Period to 18 months after the Petition Date, and the Exclusive Solicitation Period to 20 months after the Petition Date.

The Debtors’ initial Exclusive Filing Period and Exclusive Solicitation Period were set to expire on May 15, 2015, and July 14, 2015, respectively. On April 15, 2015, the Debtors filed a motion [Docket No. 1173] (the “Exclusivity Motion”) seeking a six-month extension of the Exclusive Filing Period and the Exclusive Solicitation Period to November 15, 2015, and January 15, 2015, respectively. On April 22 and 23, 2015, the Second Priority Noteholders Committee and each of the Ad Hoc First Lien Groups filed preliminary objections to the Exclusivity Motion [Docket Nos. 1243, 1272, 1273]. On April 29, 2015, the Bankruptcy Court entered a bridge order (the “Bridge Order”) extending the Debtors’ Exclusive Filing Period through May 27, 2015. After further briefing by the parties [Docket Nos. 1546, 1547, 1550, 1653], on May 27, 2015, the Bankruptcy Court entered an order extending the Exclusive Filing Period through and including November 15, 2015, and the Exclusive Solicitation Period through and including January 15, 2016 [Docket No. 1690].

 

81


On October 7, 2015, the Debtors filed a motion [Docket No. 2404] (the “Second Exclusivity Motion”) seeking to further extend the Exclusive Filing Period and Exclusive Solicitation Period to March 15, 2016, and May 15, 2016, respectively. The Second Priority Noteholders Committee filed an objection to this request on October 14, 2015 [Docket No. 2423]. On October 22, 2015, the Bankruptcy Court overruled that objection and entered an order extending the Exclusive Filing Period through and including March 15, 2016, and the Exclusive Solicitation Period through and including May 15, 2016 [Docket No. 2473].

On February 3, 2016, the Debtors filed a motion [Docket No. 3197] (the “Third Exclusivity Motion”) seeking to further extend the Exclusive Filing Period and Exclusive Solicitation Period to July 15, 2016, and September 15, 2016, respectively. No parties in interest objected to the request to extend the Exclusive Periods, though the Second Priority Noteholders Committee objected to the length of the extension [Docket No. 3217]. On February 17, 2016, the Bankruptcy Court overruled that limited objection and entered an order extending the Exclusive Filing Period through and including July 15, 2016, and the Exclusive Solicitation Period through and including September 15, 2016 [Docket No. 3283]. Because this final extension is through the statutory maximum permitted by section 1121(d)(2) of the Bankruptcy Code, the Debtors cannot request further extensions of the Exclusivity Periods, and other parties will be able to file competing chapter 11 plans on and after September 16, 2016.

 

  M. Mediation

On February 3, 2016, the Debtors filed a motion seeking the appointment of a mediator to mediate issues by and among the parties in interest related to a chapter 11 plan of reorganization [Docket No. 3196] (the “Mediation Motion”). The Mediation Motion sought to appoint a sitting bankruptcy judge as the mediator in these the Chapter 11 Cases if the parties do not reach a consensual resolution to the case prior to the release of the Examiner Report. On February 17, 2016, the Bankruptcy Court denied the Mediation Motion as unnecessary because parties could engage a private mediator without leave of the Bankruptcy Court [Docket No. 3284].

On March 1, 2016, the Debtors announced that the Honorable Joseph J. Farnan, Jr., retired Chief Judge of the United States District Court for the District of Delaware, agreed to serve as the mediator in the Chapter 11 Cases [Docket No. 3329]. After engaging Judge Farnan, the Debtors engaged their stakeholders regarding a mediation protocol and related non-disclosure agreement. On March 28, 2016, the following 20 parties entered into the mediation protocol, agreeing to enter into mediation related to confirmation of a chapter 11 plan of reorganization in the Chapter 11 Cases: (i) the Debtors, (ii) counsel to the Ad Hoc Group of First Lien Bank Lenders, (iii) certain members of the Ad Hoc Group of First Lien Noteholders, (iv) the Second Priority Noteholders Committee, (v) the Unsecured Creditors Committee, (vi) UMB, (vii) BOKF, (viii) the Ad Hoc Committee of 12.75% Second Lien Noteholders, (ix) Paulson & Co, on behalf of funds and accounts under management; (x) Quantum Partners LP; (xi) Canyon Capital Advisors LLC, on behalf of certain participating funds and managed accounts; (xii) Wilmington Trust, N.A., solely in its capacity as Subsidiary-Guaranteed Notes Indenture Trustee, (xiii) Law Debenture Trust Company of New York, solely in its capacity as indenture trustee for the Debtors’ 5.75% and 6.5% senior unsecured notes, (xiv) the Ad Hoc Group of 5.75% and 6.50% Senior Unsecured Notes, (xv) counsel for purported class plaintiff Frederick Barton Danner, (xvi) WSFS, (xvii) Delaware Trust Company, solely in its capacity as collateral agent and as indenture trustee for the Debtors’ 10.00% second-priority senior secured notes due 2015 and 2018, (xviii) CEC, (xix) CAC, and (xx) the Hon. Joseph J. Farnan (Ret.). The mediation remains ongoing at this time.

To date, the mediation’s primary focus has been on building consensus among the Debtors’ key stakeholders, including the Official Committees, the Ad Hoc Group of First Lien Bank Lenders, the Ad Hoc Group of First Lien Noteholders, CEC, and CAC. Although some of the parties to mediation were not actively involved in negotiations, the majority of such parties were represented in such negotiations by their trustees or respective committees. In addition, the Debtors remain willing to engage with any party in interest regarding any issues and concerns they may have in these chapter 11 cases as part of, or outside of, the mediation.

 

  N. The Lien Standing Challenges

On August 7, 2015, the Unsecured Creditors Committee filed the Motion of Statutory Unsecured Claimholders’ Committee for an Order, Pursuant to Bankruptcy Code Sections 1103 and 1109, Granting It Derivative Standing to Commence, Prosecute, and Settle Certain Causes of Action on Behalf of Debtors’ Estates

 

82


[Docket No. 2029] (the “UCC Lien Standing Motion”).57 On that same day, the Subsidiary-Guaranteed Notes Indenture Trustee filed the Motion of the 10.75% Notes Trustee for Entry of an Order Granting Standing and Authority to Commence, Prosecute, and Settle Certain Causes of Action [Docket No. 2027] (the “Subsidiary-Guaranteed Notes Standing Motion”). Through the UCC Lien Standing Motion and the Subsidiary-Guaranteed Notes Standing Motion, the Unsecured Creditors Committee and Subsidiary-Guaranteed Notes Trustee seek to challenge (either directly or on behalf of the Debtors’ Estates to the extent derivative standing must first be obtained) the validity, extent, and enforceability of certain prepetition security interests, mortgages, liens, and claims the Debtors purportedly granted to the Collateral Agents (collectively, the “Formal Challenges”) for the benefit of the Holders of Prepetition Credit Agreement Claims, Secured First Lien Notes Claims (and the related First Lien Notes Deficiency Claims), and Holders of Second Lien Notes Claims (collectively, the “Secured Creditors”). The Formal Challenges target: (a) the validity of the Secured Creditors’ liens in certain property, including commercial tort claims, insurance policies, gaming and liquor licenses, vessels, real property, equity interests, and intellectual property; (b) certain stipulations agreed to by the Debtors in the Final Cash Collateral Order; and (c) the Secured Creditors’ rights to assert deficiency claims under section 1111(b)(1) of the Bankruptcy Code against certain of the Debtors (as further discussed below).

The Bankruptcy Court set a briefing schedule on the UCC Lien Standing Motion at the omnibus hearing on October 21, 2015 [Docket No. 2494]. At that same hearing, the Subsidiary-Guaranteed Notes Indenture Trustee agreed to allow the Unsecured Creditors Committee to litigate the standing issues raised in Subsidiary-Guaranteed Notes Standing Motion, most of which were similar to the issues raised in the UCC Lien Standing Motion. Pursuant to the briefing schedule, the Debtors filed an objection to the UCC Lien Standing Motion on November 20, 2015, arguing that the best and most value creating resolution of the issues is the global settlement proposed by the Debtors’ Plan [Docket No. 2654]. The Ad Hoc Committee of First Lien Banks and the Ad Hoc Committee of First Lien Noteholders (and the First Lien Notes Trustee) also filed objections to the UCC Lien Standing Motion [Docket Nos. 2652, 2650]. The Unsecured Creditors Committee filed an omnibus reply on December 16, 2015, arguing that the Unsecured Creditors Committee should have exclusive authority to pursue and settle the Formal Challenges because the asserted Formal Challenges were colorable claims and that the Debtors demonstrated an “unjustifiable refusal” to pursue claims against the First Lien Noteholders, First Lien Lenders, and Second Lien Noteholders [Docket No. 2740]. On January 22, 2016, the Unsecured Creditors Committee filed an amended proposed complaint to the UCC Lien Standing Motion, eliminating and modifying certain counts based on new information received from the Debtors and the Ad Hoc First Lien Groups [Docket No. 3127]. On March 16, 2016, the Bankruptcy Court issued an opinion and order noting that the Debtors’ justification for not pursuing the Formal Challenges, namely that the pursuit of a global settlement as part of a comprehensive plan of reorganization is superior to litigation, is a reasonable exercise of the Debtors’ business judgment and sufficient grounds for denying the UCC Lien Standing Motion [Docket No. 3403]. The Bankruptcy Court did not deny this motion outright, however, instead continuing the UCC Lien Standing Motion to July 20, 2016, so as to not prejudice the Unsecured Creditors Committee if the comprehensive settlement encompassed in the Plan is not approved for any reason.

In addition, the Unsecured Creditors Committee and other parties have informally raised other challenges regarding liens on certain of the Debtors’ property (the “Informal Challenges” and, together with the Formal Challenges, the “Lien Challenges”). These Informal Challenges include issues related to the First Lien Creditors’ lien on a substantial portion of CEOC’s unrestricted cash. The Unsecured Creditors Committee has not sought standing as of the date hereof related to the Informal Challenges.

 

  O. The 1111(b) Claim Objections

Also on August 7, 2015, the Subsidiary-Guaranteed Notes Trustee filed objections [Docket Nos. 2030, 2031] (the “1111(b) Claims Objections”) to proofs of claim filed by the First Lien Collateral Agent and the First Lien Notes Indenture Trustee against 137 of CEOC’s wholly-owned Debtor subsidiaries with respect to assets other than Collateral (as such term is defined in the First Lien Collateral Agreement). The focus of the 1111(b) Claims Objections was the rights of the First Lien Creditors to assert deficiency claims under section 1111(b)(1) of

 

57  As discussed in more detail in Article IV.S.2, contemporaneously with the UCC Lien Standing Motion, the Unsecured Creditors Committee filed the Lien Challenge Adversary (as defined below), which relates to claims for which the Unsecured Creditors Committee believes it does not need to seek standing to pursue.

 

83


the Bankruptcy Code against the Subsidiary Guarantor Debtors. Specifically, the Subsidiary-Guaranteed Notes Trustee argued that the First Lien Creditors had waived their right to assert claims under section 1111(b) of the Bankruptcy Code when they waived their right to recourse against the Subsidiary Guarantor Debtors under “any law” pursuant to the First Lien Collateral Agreement. If successful, the 1111(b) Claims Objections would eliminate any deficiency claims the First Lien Creditors could assert against the Subsidiary Guarantor Debtors, which the Subsidiary-Guaranteed Notes Trustee and the Unsecured Creditors Committee have asserted would unencumber value that will substantially improve recoveries to all unsecured claimholders at the Subsidiary Guarantor Debtors. The arguments raised in the 1111(b) Claims Objections were substantially similar to certain of the arguments raised in the Subsidiary-Guaranteed Notes Standing Motion. Parties in interest agreed that the Subsidiary-Guaranteed Notes Trustee could pursue the 1111(b) Claims Objections without receiving standing to do so because the objections were claim objections allowed by the Bankruptcy Code. See Bankruptcy Code § 502(a) (allowing any creditor to file a claim objection); In re C.P. Hall Co., 513 B.R. 540, 543 (Bankr. N.D. Ill. 2014) (Goldgar, J.).

At the omnibus hearing on October 21, 2015, the Bankruptcy Court allowed discovery into the issues raised by the 1111(b) Claims Objections. The Bankruptcy Court entered an agreed scheduling order on November 6, 2015 [Docket No. 2539]. After a brief discovery period, the Subsidiary-Guaranteed Notes Trustee, the Unsecured Creditors Committee, the First Lien Lenders, the First Lien Noteholders, the Second Lien Creditors, and the Debtors each filed pre-trial briefs on January 26, 2016 [Docket Nos. 3138, 3139, 3141, 3142, 3143, 3144]. The Bankruptcy Court held a one-day evidentiary hearing on February 2, 2016, and heard closing arguments on the 1111(b) Claims Objections on February 17, 2016. On May 18, 2016, the Bankruptcy Court overruled the 1111(b) Claims Objections, finding that the First Lien Noteholders may assert unsecured deficiency claims against the Subsidiary Guarantor Debtors (the “1111(b) Order”). In the 1111(b) Order, the Bankruptcy Court held that although rights under section 1111(b) can be waived by creditors (and the First Lien Collateral Agreement, on its own, could be read to provide such waiver), the First Lien Intercreditor Agreement referenced section 1111(b) and to reconcile the First Lien Collateral Agreement with the First Lien Intercreditor Agreement, the First Lien Collateral Agreement could not be read to waive rights under section 1111(b). On May 25, 2016, the Subsidiary-Guaranteed Notes Trustee filed a notice of appeal of the 1111(b) Order [Docket No. 3825]. Pursuant to the SGN RSA, the Debtors expect that the Subsidiary-Guaranteed Notes Trustee will hold its appeal in abeyance through the Confirmation Hearing. On June 3, 2016, the Second Priority Noteholders Committee, WSFS, BOKF, and Delaware Trust Company and the Unsecured Creditors Committee also filed appeals [Docket Nos. 3925, 3927]. Pursuant to the UCC RSA, the Debtors expect that the Unsecured Creditors Committee will also be seeking to hold its appeal in abeyance through the Confirmation Hearing.

 

  P. Debtors’ Objections to Second Lien Notes Claims

 

  1. The Subsidiary Debtors’ 1111(b) Objection

On June 2, 2016, the Subsidiary Debtors filed an objection to proofs of claim filed by the Second Lien Agent and the indenture trustees for the Debtors’ four series of Second Lien Notes on behalf of the Second Lien Noteholders and themselves (such objection, the “Subsidiary Debtors’ 1111(b) Objection”) [Docket No. 3916]. The focus of this objection is the rights of Holders of Second Lien Notes to assert unsecured deficiency claims under section 1111(b) of the Bankruptcy Code against the subsidiary Debtors (collectively, the “Subsidiary Debtors”). Specifically, the Subsidiary Debtors allege that the Second Lien Creditors waived their unsecured deficiency claims against the Subsidiary Debtors under “any law” pursuant to the non-recourse language in the Second Lien Collateral Agreement. In the event that this objection is sustained, the Second Lien Noteholders recoveries against the Subsidiary Debtors would be limited to the value of the collateral specifically pledged by the Subsidiary Debtors pursuant to the Second Lien Collateral Agreement for the satisfaction of the Second Lien Notes Claims. Therefore, the resolution of the Subsidiary Debtors’ 1111(b) Objection could have a material impact on the recoveries of the Second Lien Noteholders and the unsecured creditors of the Subsidiary Debtors. As noted in the Subsidiary Debtors’ 1111(b) Objection, the arguments raised by the Subsidiary Debtors are substantially similar to the waiver argument raised by the Subsidiary-Guaranteed Notes Trustee in its 1111(b) Claims Objections, though the Second Lien Intercreditor Agreements does not have language similar to the First Lien Intercreditor Agreement that was used by the Bankruptcy Court to reconcile the Collateral Agreement and Intercreditor Agreement to find there was no waiver in the 1111(b) Order. The Subsidiary Debtors’ 1111(b) Objection is scheduled to be heard by the Bankruptcy Court on July 20, 2016.

 

84


  2. The Original Issue Discount Objection

Also on June 2, 2016, the Debtors filed an objection to the “original issue discount” portion of proofs of claim filed by the Second Lien Agent and the indenture trustees for the Debtors’ four series of Second Lien Notes on behalf of the Second Lien Noteholders and themselves [Docket No. 3915] (the “OID Objection”). At the time of their issuance, the Second Lien Notes included varying degrees of “original issue discount” (“OID”). Generally, OID is generated when the actual issue price of a note is less than its face value at issuance. Applicable non-bankruptcy law requires both the issuer and the noteholder to reflect this difference as interest for tax and accounting purposes. The OID is amortized over the life of the note. As of the Petition Date, the Debtors believe approximately $1.9 billion of OID remained unamortized for the various Second Lien Notes in the aggregate. In the OID Objection, the Debtors argue that the unamortized OID is in the nature of “unmatured interest,” as that term is used in section 502(b)(2) of the Bankruptcy Code and, therefore, the Bankruptcy Code requires disallowance of these amounts from the Second Lien Notes Claims. If successful, the OID Objection would reduce the aggregate allowed amount of the Second Lien Notes Claims from approximately $5.5 billion to approximately $3.7 billion.

If any portion of the Second Lien Notes Claim is reduced, the Plan provides for a reallocation of the recoveries available to the Holders of Second Lien Notes Claims (through the “Reduced Claim Adjustment”) to provide (a) an increase in the recoveries to the Holders of Senior Unsecured Notes Claims, Undisputed Unsecured Claims, Disputed Unsecured Claims, Convenience Unsecured Claims, and Insurance Covered Unsecured Claims in each of Class H, Class I, Class J, Class K, and Class L, respectively, to equal the increased recovery percentage to be received by Class F (as a result of the disallowance of any portion of the principal amount of Second Lien Notes Claims and the reallocation of Securities to provide the increased recovery percentages provided in this clause (a) and the following clause (b)), and (b) increase in the recoveries available to the Holders of Subsidiary Guaranteed Notes Claims in Class G to provide such Holders with recoveries increased by the same percentage commensurate with the improved recoveries available to Class H, Class I, Class J, Class K, and Class L in accordance with the foregoing clause (a). For the avoidance of doubt, neither CEC nor New CEC shall fund any additional consideration on account of an Improved Recovery Event but instead such increased recoveries shall come from a reallocation of recoveries available to the Holders of Second Lien Notes Claims on account of a Reduced Claim Adjustment.

The Reduced Claim Adjustment amounts shown in the tables below assume the current high end of the Allowed Claim range for Class J, K, and L are subject to adjustment. The tables below show the impact of the reduction and reallocation of the OpCo Series A Preferred Stock allocated to Class F claims in the event of a successful OID Objection under various voting scenarios.

Class F, Class H, Class I Accept

If Classes F, H, and I vote to accept the Plan, the Reduced Claim Adjustment will be 1.582% of New CEC Common Equity, to be distributed to Class G, Class H, Class I, Class J, Class K, and Class L pro rata based on Claim amount. The charts below show a comparison of estimated recoveries if the OID Objection is unsuccessful and if it is successful:

 

Class

   Estimated Percent
Recovery Under the Plan
(OID Objection Unsuccessful)
  Estimated Percent
Recovery Under the Plan
(OID Objection Successful)

Class F
(Each Debtor other than Non-Obligor Debtors)

   29% - 48%   41% - 68%

Class G
(CEOC and Each Subsidiary Guarantor)

   61% - 105%   68% - 119%

Class H
(CEOC)

   33% - 56%   40% - 69%

 

85


Class

   Estimated Percent
Recovery Under the Plan
(OID Objection Unsuccessful)
  Estimated Percent
Recovery Under the Plan
(OID Objection Successful)

Class I
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 68%

Class J
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 68%

Class K
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   47%   54% - 60%

Class L
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 68%

Class F, Class H, Class I Reject

If Classes F, H, and I vote to reject the Plan, the Reduced Claim Adjustment will be 1.421% of New CEC Common Equity, to be distributed to Class G, Class H, and Class I pro rata based on Claim amount. The charts below show a comparison of estimated recoveries if the OID Objection is unsuccessful and if it is successful:

 

Class

   Estimated Percent
Recovery Under the Plan
(OID Objection Unsuccessful)
  Estimated Percent
Recovery Under the Plan
(OID Objection Successful)

Class F
(Each Debtor other than Non-Obligor Debtors)

   22% - 34%   31% - 47%

Class G
(CEOC and Each Subsidiary Guarantor)

   61% - 105%   69% - 120%

Class H
(CEOC)

   22% - 33%   29% - 49%

Class I
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   22% - 33%   30% - 48%

Class J
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   34% - 54%

Class K
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   47%   47%

Class L
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   34% - 54%

 

86


Class F and Class H Accept, Class I Rejects

If Classes F and H vote to accept the Plan and Class I votes to reject the Plan, the Reduced Claim Adjustment will be 1.471% of New CEC Common Equity, to be distributed to Class G, Class H, Class J, Class K, and Class L pro rata based on Claim amount. The charts below show a comparison of estimated recoveries if the OID Objection is unsuccessful and if it is successful:

 

Class

   Estimated Percent
Recovery Under the Plan
(OID Objection Unsuccessful)
  Estimated Percent
Recovery Under the Plan
(OID Objection Successful)

Class F
(Each Debtor other than Non-Obligor Debtors)

   29% - 48%   41% - 68%

Class G
(CEOC and Each Subsidiary Guarantor)

   61% - 105%   68% - 119%

Class H
(CEOC)

   33% - 56%   40% - 70%

Class I
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   22% - 33%   22% - 33%

Class J
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 68%

Class K
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   47%   54% - 61%

Class L
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 68%

Class F and Class I Accept, Class H Rejects

If Classes F and I vote to accept the Plan and Class H votes to reject the Plan, the Reduced Claim Adjustment will be 1.278% of New CEC Common Equity, to be distributed to Class G, Class I, Class J, Class K, and Class L pro rata based on Claim amount. The charts below show a comparison of estimated recoveries if the OID Objection is unsuccessful and if it is successful:

 

87


Class

   Estimated Percent
Recovery Under the Plan
(OID Objection Unsuccessful)
  Estimated Percent
Recovery Under the Plan
(OID Objection Successful)

Class F
(Each Debtor other than Non-Obligor Debtors)

   29% - 48%   42% - 68%

Class G
(CEOC and Each Subsidiary Guarantor)

   61% - 105%   68% - 119%

Class H
(CEOC)

   22% - 33%   22% - 33%

Class I
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 69%

Class J
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 69%

Class K
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   47%   54% - 61%

Class L
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   34% - 54%   41% - 69%

 

  Q. Claims Bar Date and the Claims Objection Process

On March 17, 2015, the Debtors filed their schedules of assets and liabilities, schedules of current income and expenditures, schedules of executory contracts and unexpired leases, and statement of financial affairs [Docket Nos. 709–36, 738–65, 799–882] (collectively, the “Schedules and Statements”). The Bankruptcy Code allows a bankruptcy court to fix the time within which Proofs of Claim must be Filed in a chapter 11 case. Any creditor whose Claim is not scheduled in the Debtors’ Schedules and Statements or whose Claim is scheduled as disputed, contingent, or unliquidated must File a Proof of Claim.

On March 25, 2015, the Bankruptcy Court entered the Agreed Order (I) Setting Bar Dates for Filing Proofs of Claim, Including Requests for Payment Under Section 503(b)(9) of the Bankruptcy Code, (II) Establishing the Amended Schedules Bar Date and the Rejection Damages Bar Date, (III) Approving the Form and Manner for Filing Proofs of Claim, Including 503(b)(9) Requests, (IV) Approving Notice of Bar Dates, and (V) Granting Related Relief [Docket No. 1005] (the “Bar Date Order”), which established (a) May 25, 2015, at 5:00 p.m., prevailing Central Time as the deadline for all non-Governmental Units to File Proof of Claims in the Chapter 11 Cases; (b) July 14, 2015, at 5:00 p.m., prevailing Central Time as the deadline for all Governmental Units to File Proof of Claims in the Chapter 11 Cases; (c) procedures for Filing Proofs of Claim; and (d) the form and manner of notice of the bar dates.

To date, approximately 5,600 proofs of claim have been filed against the Debtors in the Chapter 11 Cases totaling more than $28.9 billion in the aggregate. The Debtors are now in the process of reconciling such claims to the amounts listed by the Debtors in their schedules of assets and liabilities, as amended. Working with their advisors, the Debtors have already made significant progress in identifying certain duplicate claims, claims that have

 

88


been filed against the incorrect entity, and claims made on account of equity interests. The Debtors may ask the Bankruptcy Court to disallow claims that the Debtors believe are duplicative, have been later amended or superseded, are without merit, are overstated, or should be disallowed for other reasons. The Debtors have also made substantial progress in reconciling liability amounts estimated by the Debtors and claims filed by creditors and will resolve such differences, including through the filing of objections with the Bankruptcy Court, where appropriate. In addition, as a result of this process, the Debtors may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise.

The Debtors have commenced the claims objection process in the Chapter 11 Cases. Specifically, on September 21, 2015, and in connection with the Hilton Adversary discussed in Article IV.S.4 below, the Debtors filed an objection [Docket No. 2243] (the “Hilton Claims Objection”) to proof of claim number 3031 filed by the Hilton Worldwide, Inc. Global Benefits Administrative Committee (the “GBAC”) and proof of claim number 3063 filed by Hilton Worldwide, Inc. f/k/a Hilton Hotels Corporation (“Hilton”), which is discussed more fully below. Further, and as more fully discussed above, on June 2, 2016, the Subsidiary Debtors filed the Subsidiary Debtors’ 1111(b) Objection and the Debtors filed the OID Objection, in each case, with respect to certain Claims filed by or on behalf of Holders of Second Lien Notes Claims. In addition, on November 19, 2015, the Debtors filed their first three omnibus claims objections [Docket Nos. 2645, 2646, 1647], in compliance with Bankruptcy Rule 3007(d). The Bankruptcy Court granted each of these omnibus claims objections after the claimants did not file any objections [Docket Nos. 3010, 3011, 3114]. On December 21, 2015, the Debtors filed 62 individual objections to claims filed by certain claimants [Docket Nos. 2760–2821]. Only one response was received to these objection [Docket No. 3002], and the Bankruptcy Court entered an order granting 59 of the objections (the other three were withdrawn after the creditors withdrew their proofs of claim) [Docket Nos. 3068–3071, 3073–3089, 3091–3113, 3119–3121, 3291–3305].

The Debtors likely will object to further proofs of claim as they continue the claims reconciliation process. The amounts of distributions to Holders of Second Lien Notes Claims, Undisputed Unsecured Claims, Disputed Unsecured Claims, and Senior Unsecured Notes Claims may vary depending on the outcome of the claims objection process.

 

  R. Deferred Compensation Plan Issues

Prior to the Petition Date, as part of their normal compensation program, CEC or CEOC sponsored a number of deferred compensation plans inherited from certain predecessor entities (the “Deferred Compensation Plans”).58 Currently, there are a total of approximately 340 active and inactive participants in the Deferred Compensation Plans, with plan balances ranging from a few hundred dollars to several million dollars. The Debtors estimate that, as of the Petition Date, aggregate liabilities under the Deferred Compensation Plans amounted to approximately $80.0 million. As of September 30, 2015, aggregate liabilities under the Deferred Compensation Plans amounted to approximately $73.3 million. Traditionally, payments related to the Deferred Compensation Plans have been made by CEOC on account of the entire Caesars enterprise. In 2014, for example, CEOC paid approximately $11.6 million to participants of the Deferred Compensation Plans. In order to fund liabilities associated with the Deferred Compensation Plans, various corporate-owned life insurance policies (the “COLIs”) have been purchased and contributed into either an escrow account (the “Escrow Account”) or a Rabbi trust (the “Rabbi Trust,” and collectively with the Escrow Account, the “Asset Vehicles”), which are governed by the Trust Agreement (as defined below) and Escrow Agreement (as defined below), respectively. As of the Petition Date, the Escrow Account held approximately $56.9 million of assets and the Rabbi Trust held approximately $65.9 million of assets

 

58  The plans are: (a) Harrah’s Entertainment, Inc. Executive Supplemental Savings Plan (“ESSP”); (b) Harrah’s Entertainment, Inc. Executive Supplemental Savings Plan II (“ESSP II”); (c) Harrah’s Entertainment, Inc. Executive Deferred Compensation Plan (“EDCP”); (d) Harrah’s Entertainment, Inc. Deferred Compensation Plan (“DCP”); and (e) Park Place Entertainment Corporation Executive Deferred Compensation Plan (“CEDCP”). The creation of these plans predated the 2008 LBO but the plans remained active and funded by CEC and/or CEOC until further participation and contributions were frozen prior to the Petition Date.

 

89


Shortly after the Petition Date, certain of the Debtors’ creditors, including the Unsecured Creditors Committee, sought additional information regarding the Deferred Compensation Plans and the Asset Vehicles, including information regarding which corporate entity is an obligor under the Deferred Compensation Plans and which entity owns the assets held in the Asset Vehicles. Upon agreement with the Unsecured Creditors Committee under the Wages Order, the Debtors suspended payments on account of the Deferred Compensation Plans pending a more thorough review of such plans.

The Debtors are in discussions with CEC to attempt to consensually resolve open issues related to the Deferred Compensation Plans, including an agreement or determination of which entities are liable to plan participants and which entities own the assets in the Asset Vehicles. The material terms of any settlement that may be reached will be memorialized in a formal settlement agreement to be filed as part of the Plan Supplement. Absent such a settlement, CEOC and CEC reserve all of their respective rights as to these matters.

As of the date hereof, Holders of Claims on account of the Deferred Compensation Plans shall be entitled to vote on the Plan. All Claims related to the Deferred Compensation Plans are General Unsecured Claims and classified in either Class I or Class J in accordance with the terms of the Plan. Accordingly, any Claims ultimately allowed against CEOC will receive the treatment specified for Class I (Cash and securities with a value equal to a recovery of approximately 44% (midpoint) if Class I votes to accept the Plan or equal to a recovery of approximately 27.5% (midpoint) if Class I votes to reject the Plan) or Class J (Cash and securities with a value equal to a recovery of approximately 44% (midpoint)). If CEOC and CEC reach a settlement pursuant to which CEC assumes certain liabilities on account of the Deferred Compensation Plans, then those Claims covered by such assumption will have recourse exclusively against CEC and will not receive treatment under the Plan. For any liabilities assumed by CEOC in connection with any such settlement, all Claims covered by such assumption will be treated as Class I Undisputed Unsecured Claims under the Plan and Holders of such Claims will not be entitled to any additional recovery (including from CEC) on account of such Claims. If there is no settlement among CEOC and CEC and no other determination through litigation or otherwise as to which entity is liable to participants in the Deferred Compensation Plans, and unless CEC agrees otherwise, all Claims related to the Deferred Compensation Plans that are Allowed Claims will receive the treatment in either Class I or Class J, and any such Claims that are disallowed as against CEOC will receive no recovery under the Plan and may have no recourse against CEC as a result of the Third-Party Release contemplated by the Plan.

In addition, if a Deferred Compensation Plan Settlement is not reached, it is possible that the Debtors will not be able to satisfy the Plan closing condition that the General Unsecured Claims in Class I, Class J, Class K, and Class L equal, in the aggregate, $350 million or less, and unless such condition is waived in accordance with the Plan, the Debtors may be unable to consummate the Plan. The Debtors reserve all rights in this respect.

Holders of Claims on account of the Deferred Compensation Plans may contact the Debtors’ counsel to discuss the status of their Claims.

The position of the EDCP and DCP plan participants who objected to the Disclosure Statement (the “Participants”) is that CEOC and CEC are jointly and severally liable for all obligations relating to the EDCP and DCP plans. Accordingly, the Participants believe that they are entitled to be paid 100% of their claims, plus interest, and all unpaid post-petition amounts. Additionally, the Participants believe all payments that were suspended post-petition should be resumed, whether this is accomplished through distributions and/or a resumption of payments by CEOC, or CEC, or both entities. The amounts owed to the Participants are insignificant in terms of the Debtors’ Plan and the Participants’ treatment is not in any way critical to confirmation. Thus, Participants believe that CEC cannot be released from its liabilities under the EDCP and DCP, whether under a plan of reorganization in these bankruptcy cases or by any other means. The Debtors’ position is currently unknown because they have not yet disclosed which entities they believe might be liable for the EDCP and DCP plans, nor have they disclosed which entity or entities funded the assets in the Asset Vehicles which support the EDCP and DCP plans. To the extent the Debtors’ Plan has the effect of the Participants receiving less than 100% of their claims, plus interest, plus post-petition payments, the Participants vigorously oppose such treatment. Similarly, the Participants believe that the assets in the Asset Vehicles or a majority of those assets should be retained by whichever entity agrees to pay the EDCP and DCP plan liabilities presently and in the future, as may be needed from time to time, and that any other use of the Asset Vehicles is inconsistent with their original purpose and would be opposed by the Participants.

 

90


  S. Adversary Proceedings and Contested Matters

 

  1. Section 105 Adversary Proceeding

On March 11, 2015, the Debtors commenced an adversary proceeding in the Bankruptcy Court to, among other things, enjoin the continuation of the WSFS Delaware Action, the Unsecured Noteholder SDNY Actions, and the BOKF SDNY Actions (collectively, the “Parent Guarantee Litigation”) against CEC pursuant to section 105(a) of the Bankruptcy Code (the “105 Adversary Proceeding”). As further discussed in the Debtors’ pleadings in the 105 Adversary Proceeding, the Debtors believe that continuation of the Parent Guarantee Litigation outside of the Chapter 11 Cases imperils the Debtors’ ability to reorganize. Specifically, the Debtors believe that their reorganization requires a substantial contribution from CEC, whether through settlement or litigation, to fund recoveries for the Debtors’ creditors. Any consideration that CEC pays on account of its purported guarantees of the Debtors’ funded debt obligations would reduce CEC’s ability to make a contribution to the Debtors under the Plan (or through litigation to the extent that the settlement encompassed in the Plan fails). As has been noted by counsel to purported class plaintiff Frederick Barton Danner in the Danner SDNY Action, CEC’s investment banker believed that CEC had sufficient cash as of the date of his testimony (June 4, 2015) to pay the claims in the Danner SDNY Action if plaintiffs in the Danner SDNY Action were successful (and excluding the potential for claims against CEC in the other Parent Guarantee Litigation). See Hr’g Tr. 98:15–100:11, June 4, 2015; see also id. 101:11–102:8 (similar testimony as to the claims asserted in the MeehanCombs SDNY Action, again excluding the potential for claims against CEC in the other Parent Guarantee Litigation). But as CEC stated at trial in the 105 Adversary Proceeding, an adverse ruling in any of the actions in the Parent Guarantee Litigation may very well cause CEC to seek protection under the Bankruptcy Code, which would drastically upset the Debtors’ reorganization process given the Debtors’ own claims against CEC. See, e.g., Hr’g Tr. 207:2–208:21, June 3, 2015; id. 208:6–13 (“Given the likely cascading effect of any one litigation leading to the potential—the bad facts related to the other litigation, CEC would likely have to consider, amongst other things, filing for bankruptcy to avoid, you know, having to fund those claims, which it could not fund, nor would it have the resources to likely appeal those claims. So bankruptcy would be a real option.”).59

Following an evidentiary trial and briefing by the parties, the Bankruptcy Court issued an opinion [Adv. Case. No. 15-00149 (ABG), Docket Nos. 158] (the “Original 105 Opinion”) and order [Adversary Case No.-15-00149 (ABG), Docket No. 159] on July 22, 2015, denying the Debtors’ request in the 105 Adversary Proceeding. The Bankruptcy Court held that controlling precedent required that “[u]nless the debtor’s estate has a claim against the non-debtor, and unless that claim is based on the same acts and would be paid from the same assets as the third party’s claim against the non-debtor, no relief is possible” from a bankruptcy court to enjoin that non-debtor third party litigation pursuant to section 105.” See Original 105 Opinion at 28.

On July 24, 2015, the Debtors appealed this ruling, in an appeal captioned Caesars Entertainment Operating Company, Inc., et al. v. BOKF, N.A. Wilmington Savings Fund Society, FSB, MeehanCombs Global Credit Opportunities Master Fund, LP, Relative Value-Long/Short Debt Portfolio, a Series of Underlying Funds Trust, SB 4 CF LLC, CFIP Ultra Master Fund, LTD., Trilogy Portfolio Company, LLC, and Frederick Barton Danner, Case No. 15-cv-06504 (RWG) (the “105 Appeal”). In the 105 Appeal, the Debtors argued that the Bankruptcy Court’s “same acts” requirement is a misapplication of precedent from United States Court of Appeals for the Seventh Circuit (the “Seventh Circuit”), and requested that the District Court enter the requested section 105 injunction to protect the Debtors’ interests in CEC’s contributions to the Debtors pursuant to the Plan, or remand to the Bankruptcy Court to enter such an order or further consider the requested injunction. The District Court held oral argument in the 105 Appeal on September 29, 2015. On October 8, 2015, the District Court entered an order [Docket No. 42], and memorandum opinion and order [Docket No. 43], affirming the Bankruptcy Court’s ruling. On October 9, 2015, the

 

59  The Debtors note that they expect that the parties to the Parent Guarantee Litigation will seek additional facts as to CEC’s wherewithal to make payments outside of the settlement embodied in the Plan as part of any objections to confirmation of the Plan. At this time, there has been no testimony on CEC’s ability as of the date of this Disclosure Statement to make the contributions contemplated by the Plan and pay any of the claims in the Parent Guaranty Litigation. However, the Ad Hoc Group of 5.75% and 6.5% Notes has noted that counsel for the Debtors stated on the record at the evidentiary hearing on the Renewed 105 Motion, “I don’t think there is any dispute that CEC could pay a $14 million judgment.” Hr’g Tr. 163:23–24, June 8, 2016.

 

91


Debtors filed a notice of appeal of the District Court’s ruling to the Seventh Circuit [Docket No. 45]. Briefing before the Seventh Circuit concluded on November 30, 2015, and oral argument was held before a panel of Seventh Circuit judges on December 10, 2015. On December 23, 2015, the Seventh Circuit vacated the denial of the injunction and remanded to the Bankruptcy Court on the grounds that the “same acts” requirement was a misapplication of controlling Seventh Circuit case law [Docket No. 46]. On January 11, 2016, certain of the Defendants-Appellees filed a petition for rehearing en banc by the full Seventh Circuit [Docket No. 53]. On January 25, 2016, the Seventh Circuit denied this request for rehearing and on February 2, 2016, the Seventh Circuit issued its mandate, revesting jurisdiction in the Bankruptcy Court.

On remand, the Bankruptcy Court took judicial notice of certain additional facts from the Chapter 11 Cases and the Parent Guarantee Litigation, including a pending trial date in the BOKF SDNY Action set for March 14, 2016, and a pending trial date in the Unsecured Notes SDNY Actions set for May 9, 2016. Based on the factual findings from the trial in the 105 Adversary Proceeding and judicial notice of these additional facts, on February 26, 2016, the Bankruptcy Court issued a ruling [Docket No. 214] (the “105 Order”), which enjoined the BOKF SDNY Action until the earlier of (a) 60 days after the Examiner files his final (redacted) report and (b) May 9, 2016. On May 9, 2016, the injunction expired.

As discussed in Article III.D above, each of the SDNY Actions (including the BOKF SDNY Action) was subject to a summary judgment schedule culminating on June 24, 2016, with oral argument, and a “global” trial starting on August 22, 2016, if necessary. Similarly, the WSFS Action was subject to a summary judgment schedule culminating in oral argument on June 16, 2016. On June 6, 2016, the Debtors filed an emergency motion (the “Renewed 105 Motion”) seeking a temporary restraining order and preliminary injunction enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits because the Debtors believe such an injunction is necessary to protect the Debtors’ ability to reorganize in the Chapter 11 Cases [Adv. Case. No. 15-00149 (ABG), Docket No. 241]. An evidentiary hearing on the Renewed 105 Motion was held on June 8, 9, and 13, 2016. On June 15, 2016, the Bankruptcy Court granted the Renewed 105 Motion, enjoining the plaintiffs in the Parent Guarantee Litigation from further prosecuting their guaranty lawsuits until August 29, 2016 [Docket No. 274]. The Southern District of New York has scheduled oral argument in the SDNY Actions for August 30, 2016. The Debtors reserve their rights with respect to further injunctions.

 

  2. Unsecured Creditors Committee Lien Challenge Adversary

On August 7, 2015, the Unsecured Creditors Committee filed an adversary complaint out of an abundance of caution against the indenture trustees and Collateral Agents under the First Lien Debt and the Second Lien Debt (the “Lien Challenge Adversary”). See Statutory Unsecured Claimholders’ Committee v. BOKF, N.A., et al., Adversary Case No. 15-00571 (ABG) [Docket No. 1]. As discussed in detail above, the Unsecured Creditors Committee filed the Lien Challenge Adversary contemporaneously with the UCC Lien Standing Motion, which separately requested standing to pursue each of the claims alleged in the Lien Challenge Adversary. The Unsecured Creditors Committee contends that although the Cash Collateral Order provides that the filing of a standing motion will toll the deadline to file the challenges set forth in such standing motion until the standing motion is decided by the Bankruptcy Court, such tolling only applies if the standing motion is “necessary” or “required.” See Cash Collateral Order ¶ 12(b). Thus, separate from its motion seeking standing to pursue various causes of action on behalf of the Debtors’ Estates, the Lien Challenge Adversary relates to claims for which the Unsecured Creditors Committee believes it already has standing to pursue.

The Lien Challenge Adversary includes claims related to: (a) the “recourse stipulation” in the Cash Collateral Order, which states that each Subsidiary Guarantor is liable for the full amount of the First Lien Debt as of the Petition Date; (b) the lien stipulations in the Cash Collateral Order regarding commercial tort claims, insurance policies, gaming and liquor licenses, equity securities, vessels, real property, and intellectual property; (c) a clarification that at least thirty-two of the Debtors are not pledgors under the Collateral Agreements and are therefore not liable for the First Lien Debt; (d) provisions in the Cash Collateral Order that include “fees, costs, and other charges” in the secured debt claims (the “Fees & Charges Stipulation Count”); and (e) certain of the nonrecourse pledges contained in the Collateral Agreements, which the Unsecured Creditors Committee believes prohibits Holders of Claims related to First Lien Debt and Second Lien Debt from pursuing the First Lien Pledgors and Second Lien Pledgors for payment of the First Lien Debt and Second Lien Debt beyond the value of the pledged First Lien Collateral and Second Lien Collateral (the “1111(b) Count”), which count is similar to the 1111(b) Claim Objections filed by the Subsidiary-Guaranteed Notes Trustee.

 

92


On September 8, 2015, the parties to the Lien Challenge Adversary entered into a stipulation providing the defendants therein an additional 30 days to respond to the plaintiff’s complaint. On October 21, 2015, the Bankruptcy Court granted the defendants’ motion to extend time to respond until January 20, 2016. On January 6, 2016, the Defendants filed another motion to extend the time to respond and on January 15, 2016, the Bankruptcy Court granted the motion, setting March 7, 2016, as the response deadline. On March 2, 2016, the defendants filed another motion to extend the time to respond to the complaint, which was granted by the Bankruptcy Court on March 14, 2016, thereby setting May 13, 2016, as the date by which each of the defendants needed to respond to the complaint. Also on March 2, 2016, the Second Lien Collateral Agent filed a motion to dismiss, seeking dismissal of the 1111(b) Count as to the proofs of claim filed by the Second Lien Collateral Agent and the second lien indenture trustees [Docket No. 19]. On March 7, 2016, the Second Lien Collateral Agent filed a second motion to dismiss, seeking dismissal of the Fees & Charges Stipulation Count as to certain stipulations granted in the Cash Collateral Order to the Second Lien Collateral Agent [Docket No. 23]. On March 22, 2016, the Unsecured Creditors Committee and the Second Lien Collateral Agent entered into a stipulation related to the 1111(b) Count [Docket No. 31], pursuant to which the Unsecured Creditors Committee amended its complaint to dismiss the 1111(b) Count without prejudice to the Unsecured Creditors Committees’ rights to later assert such claims [Docket No. 32]. The Lien Challenge Adversary is currently pending before the Bankruptcy Court, and no rulings or briefing schedules have been set on the pending motions to dismiss.

 

  3. The NRF Adversary and Related Litigation in the Southern District of New York

Prior to the Petition Date, certain of the Debtors were employers (the “Employers”) within the meaning of the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001–1461 (“ERISA”) and had contractual obligations to make contributions to the National Retirement Fund (the “NRF”), a multiemployer pension fund within the meaning of ERISA, which is also a member of the Unsecured Creditors Committee. In December 2014, the NRF threatened CEOC, CEC, and the other members of the Caesars “controlled group” (as defined in ERISA) with expulsion from the NRF due to, among other things, the Challenged Transactions. CEOC, CEC, and their affiliates dispute the NRF’s ability to do so. However, to protect their interests, on December 21, 2014, CEOC, CEC, and CERP entered into a standstill agreement with the NRF, pursuant to which the NRF agreed not to expel any member of the Caesars controlled group and the members of the controlled group agreed to provide the NRF with five days’ notice of certain “insolvency events” defined therein. On January 8, 2015, in light of CEOC’s impending voluntary chapter 11 filing, the members of the Caesars controlled group provided the NRF with notice that they were terminating the prepetition standstill agreement and CEC commenced an action against the NRF and its board of trustees in the United States District Court for the Southern District of New York, captioned Caesars Entertainment Corporation v. Pension Plan of the National Retirement Fund and Board of Trustees of the National Retirement Fund, Case No. 15-cv-00138 (the “CEC SDNY Action”). Through the CEC SDNY Action, CEC sought a declaratory judgment that the NRF lacks the authority or power to (a) refuse pension fund contributions made to the NRF in accordance with the Debtors’ obligations or (b) cause the withdrawal from the NRF of any of the Debtors. The CEC SDNY Action is discussed further below.

On January 12, 2015, notwithstanding the involuntary chapter 11 proceeding commenced against CEOC that morning, the NRF sent a letter to the Employers notifying them that, effective immediately, the NRF had terminated their participation in the fund and that the fund would cease accepting their contributions (the “Expulsion”). This letter was purportedly corrected and superseded the following day, January 13, 2015, when the NRF sent a letter asserting that the Employers were only expelled from the Legacy Plan of the NRF, and not from the Adjustable Plan of the NRF.

Further, on February 13, 2015, the NRF sent CEC and CERP a notice of payment demand (the “Payment Demand”) assessing withdrawal liability of approximately $462 million (as reduced by the “20-year cap” imposed by ERISA) against CEC and CERP on account of the purported Expulsion. The Payment Demand seeks to impose on CEC and CERP the obligation to make quarterly payments of approximately $6 million for the next twenty years. On May 22, 2015, the Legacy Plan of the NRF (f/k/a the Pension Plan of the NRF) filed proof of claim number 3484 against each of the Debtors for withdrawal liability incurred in connection with the purported Expulsion (the “NRF Claim”), which was filed in the same amount as the Payment Demand.

 

93


The Debtors dispute the validity of the NRF’s actions and reserve all of their rights with respect to such actions, including with respect to any rights they may have to contest such actions or any asserted liability as a result of such actions under applicable bankruptcy and non-bankruptcy laws, rules, and regulations. Nevertheless, if the NRF’s actions are determined to constitute the Debtors’ complete withdrawal from the NRF, the Debtors could be subject to withdrawal liability under ERISA exceeding $300 million, which could materially reduce the Debtors’ estimated recoveries to Holders of Claims in the Chapter 11 Cases.

On March 6, 2015, the Debtors commenced an adversary proceeding in the Chapter 11 Cases captioned Caesars Entertainment Operating Company, Inc., et al., vs. The Board of Trustees of the National Retirement Fund and The Pension Plan of the National Retirement Fund, Adv. Case No. 15-00131 (ABG) (the “362 Adversary Proceeding”), asserting, among other things, that the NRF’s Payment Demand to CEC and CERP was a violation of the automatic stay arising under section 362 of the Bankruptcy Code and that such Payment Demand could not be binding upon the Debtors notwithstanding the applicability of ERISA. Also on March 6, the Debtors filed in the voluntary Chapter 11 Cases the Debtors’ Motion for Entry of an Order (I) Enforcing the Automatic Stay, (II) Voiding Actions Taken in Violation of the Automatic Stay, (III) for Contempt and Sanctions Against the NRF and the NRF Trustees, and (IV) Granting Related Relief [Docket No. 644] (the “Expulsion Motion”), asserting that the purported Expulsion by the NRF of the applicable Debtors on January 12, 2015, was a violation of the automatic stay arising in CEOC’s involuntary chapter 11 case on that date. On March 11, 2015, the Debtors filed in the 362 Adversary Proceeding the Debtors’ Motion for Entry of an Order (A) Extending the Automatic Stay to Enjoin Certain Payments and Legal Processes, and (B) Granting Related Relief [NRF Adversary Docket No. 8] (the “Injunction Motion”), requesting that the Bankruptcy Court enjoin the continuation of CEC’s and CERP’s payment obligations arising due to the Payment Demand as well as the legal processes required under ERISA due to the Payment Demand. Finally, on March 27, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Enforcing the Automatic Stay with Respect to the Demand for Interim Withdrawal Liability Payments By the NRF, (II) Voiding Such Payment Demands Taken in Violation of the Automatic Stay, and (III) Granting Related Relief [Docket No. 1018] (the “Payment Demand Motion”), asserting that the NRF’s Payment Demand to CEC and CERP was a violation of the automatic stay, which motion is substantially similar to count one in the 362 Adversary Proceeding.

On March 20, 2015, CEOC, the applicable Debtors, CEC, CERP, and the NRF entered into a Standstill Agreement, which stayed the requirement that CEC and CERP make payments to the NRF on account of the Payment Demand and instead deferred such payments until after the Bankruptcy Court had dismissed the Expulsion Motion, the Payment Demand Motion, and the Injunction Motion (the “Standstill Agreement”). Under the Standstill Agreement, the Caesars controlled group must remit monthly payments to the NRF at the rate and on the same terms that the Caesars controlled group would have been obligated to remit contributions to the NRF had an alleged withdrawal not occurred (the “Monthly Interim Payments”). The portion of each of the Monthly Interim Payments equal to the amount the Caesars controlled group is obligated to contribute may be allocated and applied to the Adjustable Plan of the NRF for that month and to the Legacy Plan of the NRF in the NRF’s discretion. Failure to make any of the Monthly Interim Payments pursuant to the Standstill Agreement will permit the NRF to terminate the Standstill Agreement by written election, on five days’ notice, subject to cure within that period, and/or seek whatever other relief may be appropriate. The Bankruptcy Court entered an order approving the Standstill Agreement and setting a briefing schedule with respect to each of the Expulsion Motion, the Payment Demand Motion, and the Injunction Motion [Docket No. 1020]. The parties completed briefing on those matters pursuant to the Standstill Agreement.

On November 12, 2015, the Bankruptcy Court issued an opinion [Docket No. 2567] and entered an order [Docket No. 2569] denying the Payment Demand Motion and the Expulsion Motion, holding that because the expulsion letter was not addressed to CEOC (as the involuntary debtor on January 12, 2015) and the Payment Demand was sent to non-Debtors CEC and CERP and not to any Debtors, the automatic stay was not violated, notwithstanding the potential implications under ERISA that liability for one member of the Caesars controlled group would be liable for all members of the Caesars controlled group (including the Debtors). The Debtors filed an appeal of the Bankruptcy Court’s decision, which is currently pending before the District Court in an appeal captioned Caesars Entm’t Operating Co., Inc. v. The Board of Trustees of the Nat’l Retirement Fund, Case No. 15-cv-10565 (N.D. Ill) (the “NRF Appeal”). By agreement of the Debtors and the NRF, the briefing in the NRF Appeal was temporarily extended to permit the parties time to negotiate a potential settlement. On June 15, 2016, the Debtors filed their opening brief in the NRF Appeal [Docket No. 25].

 

94


On November 19, 2015, the Bankruptcy Court entered an order dismissing Counts I and II of the complaint in the 362 Adversary Proceeding [NRF Adversary Docket No. 76]. The Bankruptcy Court dismissed Count I with prejudice for failure to state a claim as it was duplicative of the Payment Demand Motion, which the Bankruptcy Court had denied. The Bankruptcy Court dismissed Count II without prejudice for lack of subject matter jurisdiction. The Bankruptcy Court continued Count III of the complaint and the Injunction Motion for further proceedings. Those matters remain pending at this time.

In addition to the matters with respect to the NRF in the Chapter 11 Cases and the CEC SDNY Action, the NRF commenced an action against CEC and CERP in the United States District Court for the Southern District of New York, captioned The National Retirement Fund, et al. v. Caesars Entertainment Corporation, et al., Civil Action No. 15-CV-02048 (the “NRF SDNY Action”), seeking, among other things, payment of the amounts requested in the Payment Demand. CEC filed a motion to dismiss on July 2, 2015 [Docket No. 12], based on the Standstill Agreement. On November 17, 2015, the magistrate judge overseeing the NRF SDNY Action recommended that Caesars’ motion to dismiss be denied [Docket No. 26] because CEC’s contractual defense was a matter that must be determined by an arbitrator under the ERISA statutory scheme. The court subsequently adopted the report and recommendations of the magistrate judge, denying CEC’s motion to dismiss on December 25, 2015 [Docket No. 29]. Subsequently, on February 26, 2016, the NRF moved for summary judgment seeking interim withdrawal liability payments from CEC and CERP on account of the Payment Demand [Docket No. 41]. On May 5, 2016, the magistrate judge in the CEC SDNY Action issued a report and recommendation [Docket No. 54] which would require CEC to pay any interim amounts now currently due notwithstanding the standstill in place. If adopted by the District Court for the Southern District of New York, this ruling may result in a $7.9 million liability against CEC and CERP on account of the initial quarterly withdrawal liability payment as well as potentially subsequent interim quarterly payments while the parties arbitrate the propriety of the expulsion and the amount of the withdrawal liability. On May 19, 2016, CEC objected to the report of the magistrate judge, asserting that a material issue of genuine fact exists and the district court should therefore reject the report’s recommendation and deny the NRF’s summary judgment motion [Docket No. 55]. The parties are awaiting a ruling as of the date hereof.

On November 17, 2015, the magistrate judge overseeing the CEC SDNY Action recommended that the NRF’s motion to dismiss the CEC SDNY Action be granted [Docket No. 33] because under the ERISA statutory scheme, the issue of whether the NRF had the statutory or contractual right under its trust agreement to expel the Caesars controlled group is a matter that must be arbitrated in the first instance. The court subsequently adopted the report and recommendations of the magistrate judge, granting the NRF’s motion to dismiss on December 25, 2015 [Docket No. 36]. CEC appealed this dismissal, which appeal remains pending as of the date hereof.

Additionally, certain trustees of the Board of Trustees for the NRF commenced an action against the NRF and certain other trustees of the Board of Trustees for the NRF, currently pending in the United States District Court for the Southern District of New York, captioned Wilhelm, et al. v. Noel Beasley, et al., Civil Action No. 15-CV-04029 (the “NRF Trustee SDNY Action”), asserting, among other things, that the NRF did not have the ability to expel the Employers from the NRF. The defendants in the NRF Trustee SDNY Action filed counterclaims on July 29, 2015 [Docket No. 66]. On February 2, 2016, the court granted a 60-day stay of the NRF Trustee SDNY Actions to allow the parties to focus on settlement discussions [Docket No. 102]. On April 5, 2016, the court issued an order directing the parties in the NRF Trustee SDNY Action to submit a stipulation and order of dismissal by April 15, 2016, that would dismiss the case without prejudice and make clear that the case is subject to reinstatement upon motion by either party by January 31, 2017 [Docket No. 106].

The NRF SDNY Action and the appeal of the dismissal of the CEC SDNY Action are each currently pending and may affect the outcome of the proceedings with the NRF in the Chapter 11 Cases and the NRF’s final claim amount, if any.

 

95


As highlighted below in Article V.A.2, recoveries available under the Plan may materially differ from the projected amounts indicated herein if the NRF is found to have an Allowed $362 million joint and several liability General Unsecured Claim against each of the Debtors.60 As noted above in Article IV.J.8, the Unsecured Creditors Committee’s support of the Plan is premised on the Debtors reaching a settlement with the NRF. Those settlement discussions remain ongoing. If the Debtors are unable to reach a settlement with the NRF, they may be unable to confirm the Plan or to consummate the Plan if it is confirmed. Each of the Debtors and the NRF reserve all rights in this respect.

 

  4. The Hilton Adversary

In December 1998, Hilton spun-off its gaming operations and related assets and liabilities into Park Place Entertainment Corporation (“Park Place”). In connection with the spin-off, Hilton and Park Place entered into various agreements, including (a) an Employee Benefits and Other Employment Allocation Agreement dated December 31, 1998 (the “Allocation Agreement”), whereby Park Place assumed or retained, as applicable, certain liabilities and excess assets, if any, related to the Hilton Hotels Retirement Plan (the “Hilton Plan”), and (b) a Distribution Agreement by and between Hilton and Park Place dated as of December 31, 1998 (the “Distribution Agreement,” and with the Allocation Agreement, the “Hilton Agreements”), whereby Hilton “spun off” its gaming operations, assets, and liabilities to Park Place. CEOC is the ultimate successor to the Allocation and Distribution Agreements.

In 1998, a class action on behalf of employees participating in the Hilton Plan was commenced against Hilton and the Hilton Plan in the United States District Court for the District of Columbia (the “Kifafi Court”) in a case captioned Kifafi v. Hilton Hotels Retirement Plan, et al., No. 98-cv-01517 (the “Kifafi Litigation”), for alleged violations of ERISA. In 2009, the Kifafi Court granted summary judgment against Hilton and the Hilton Plan with respect to certain of the claims asserted in the Kifafi Litigation. In 2011, the Kifafi Court entered its remedies decision which, among other things, required Hilton and the Hilton Plan to amend the Hilton Plan to address the ERISA violations identified by the Kifafi Court and to make additional contributions to the Hilton Plan consistent with the amendments. In light of the Kifafi Court’s remedies order and the resulting amendments to the Hilton Plan, Hilton asserts that, since 2011, it has made additional contributions to the Hilton Plan totaling approximately $73,266,881. Of this amount, Hilton and the Hilton Plan allege that Hilton contributed approximately $23,262,870 with respect to the benefits of the “Park Place Individuals” and is thus subject to payment by CEOC and/or CEC.

None of Park Place, CEC, or CEOC was ever named as defendant in the Kifafi Litigation. CEOC and CEC have asserted that they did not have notice of the Kifafi Litigation until 2009, though Hilton disputes this assertion because the Kifafi Litigation was commenced prior to the Park Place spin-off and Hilton and Park Place had overlapping boards of directors after the spin-off. Despite these positions, it is undisputed that Hilton sent a letter informing Park Place of the Kifafi Court’s summary judgment ruling in 2009. In December 2013, Caesars received a further letter from Hilton notifying it that all final court rulings had been rendered in relation to the Kifafi Litigation. Caesars was subsequently informed that its obligation under the Allocation Agreement was approximately $54 million, and that approximately $19 million related to contributions for historical periods and approximately $35 million relates to estimated future contributions. Caesars disputed these amounts. On November 21, 2014, in response to a letter from Hilton, Caesars agreed to attempt to mediate a resolution of the matter.

After the Debtors’ entry into the Prepetition RSA, on December 24, 2014, Hilton, the GBAC, and Sheldon T. Nelson, as plan administrator for the Hilton Plan (collectively, the “Hilton Plaintiffs”), commenced a lawsuit (the “Hilton Lawsuit”) against CEOC and CEC in the United States District Court for the Eastern District of Virginia (the “Virginia Court”). The Hilton Lawsuit relies upon the Hilton Agreements and ERISA and seeks monetary and equitable relief in connection with this ongoing dispute. On January 14, 2015, the Hilton Plaintiffs filed an amended complaint dismissing CEOC as a defendant, in light of the commencement of the Involuntary Proceeding against CEOC on January 12, 2015. On April 14, 2015, the Virginia Court dismissed the unjust enrichment claims asserted in the Hilton Lawsuit and otherwise transferred venue for the remaining claims to the District Court, concluding, among other things, that resolution of the Hilton Lawsuit was “related to” the Chapter 11

 

60  For purposes of voting to accept or reject the Plan, unless the Debtors object to the NRF’s Claim in accordance with the Solicitation Procedures Order, the NRF will have a Claim against each Debtor and will vote in the applicable Class for non-agreed to General Unsecured Claims at each Debtor (i.e., Class J, Class M, Class N, Class O, and Class P).

 

96


Cases. See Hilton Worldwide, Inc. Global Benefits Admin. Comm. v. Caesars Entm’t Corp., 532 B.R. 259 (E.D. Va. 2015). On July 30, 2015, the Hilton Lawsuit was referred to this Court in an adversary case captioned Hilton Worldwide Inc., Global Benefits Administrative Committee, et al. v. Caesars Entm’t Corp.), Adv. No. 15-00545.

On August 10, 2015, the Hilton Plaintiffs filed a motion [Adv. Pro. No. 15-00545 (ABG), Docket No. 15] (the “CEC Motion to Withdraw”) seeking to withdraw the reference to the Bankruptcy Court. On August 31, 2015, CEC filed a motion in the Bankruptcy Court seeking to dismiss the Hilton Lawsuit in its entirety pursuant to Rules 12(b)(6) and 12(b)(7) of the Federal Rules of Civil Procedure [Adv. Pro. No. 15-00545 (ABG), Docket No. 22] (the “Motion to Dismiss”). On September 29, 2015, CEC filed its opposition to the CEC Motion to Withdraw [Civ. No. 15-03349 (JLA), Docket Nos. 64 & 65], and on September 30, 2015, Hilton filed its opposition to the Motion to Dismiss [Adv. Pro. No. 15-00545 (ABG), Docket No. 27]. Briefing on both the CEC Motion to Withdraw and the Motion to Dismiss are complete.

As noted above, the Debtors filed the Hilton Claims Objection in the Chapter 11 Cases, which objects to Hilton’s and GBAC’s claims that are substantially similar to the claims asserted in the Hilton Lawsuit. On October 14, 2015, Hilton and GBAC filed a preliminary objection to the Hilton Claims Objection and a motion to withdraw the reference to the Bankruptcy Court of the Hilton Claims Objection (the “CEOC Motion to Withdraw”) [Docket No. 2420]. The CEOC Motion to Withdraw was docketed in the District Court as Case No. 15-cv-09596. No further briefing has occurred on the Hilton Claims Objection of the CEOC Motion to Withdraw as of the date hereof.

By agreement of CEOC, CEC, and the Hilton Parties, the parties have requested a stay of any ruling related to the CEC Adversary Proceeding (including on either the CEC Motion to Withdraw or the Motion to Dismiss) or on the Hilton Claims Objections while the parties use the time to negotiate a global settlement. These stays currently run through July 29, 2016.

On June 21, 2016, the Debtors, CEC, and the Hilton Parties executed an agreement setting forth a global resolution of the Hilton Claims Objection, Hilton Adversary, and related issues discussed above (the “Hilton Settlement”). If approved, the Hilton Settlement will avoid the continued litigation of complex issues in multiple fora, provide greater clarity on the claims pool and related recoveries at CEOC under the Plan, reduce CEOC’s potential out-of-pocket liability by approximately 17 percent, and ensure that future funding obligations under the Hilton Agreements will be satisfied. At a high level, the terms of the Hilton Settlement include, among other things:

 

    Hilton will have an Allowed, General Unsecured Claim against CEOC of no less than $51 million on account of past and future funding obligations to the Hilton Plan, plus 31.75 percent of any amounts paid by Hilton to the Hilton Plan from July 16, 2016 through the Effective Date. The GBAC’s Claim will be disallowed and expunged on the Effective Date. Pursuant to a separate agreement between the Hilton Parties and CEC, Hilton must pay CEC an amount equal to the recovery it receives under the Plan on account of $24.5 million of its Allowed Claim against CEOC.

 

    Hilton will also have an Allowed, General Unsecured Claim against CEOC up to a maximum of $14,712,106.00 on account of CEOC’s obligations under the Hilton Supplemental Executive Retirement Plan (“SERP”) and Hilton Retirement Benefit Replacement Plan (“Replacement Plan”). Hilton has the option, at any time prior to the Effective Date, to assume responsibility for these obligations with respect to participants specifically identified in the Hilton Settlement. Any SERP or Replacement Plan obligations not expressly assumed by Hilton by the Effective Date will be included in its Allowed Claim amount, subject to the $14,712,106.00 cap.

 

    On the Effective Date, CEOC, CEC, and the Hilton Parties will amend the Allocation Agreement and CEC will assume CEOC’s obligations under the Allocation Agreement, as amended, from and after the Effective Date (other than those related to the SERP or Replacement Plan).

 

    The Hilton Adversary will be stayed indefinitely and, upon the Effective Date, dismissed with prejudice. The Hilton Claims Objection will be withdrawn without prejudice upon entry of an order from the Bankruptcy Court approving the Hilton Settlement and, on the Effective Date, withdrawn with prejudice.

 

97


The Debtors have sought approval of the Hilton Settlement pursuant to a motion filed with the Bankruptcy Court on June 21, 2016 [Docket No. 4081] (the “Hilton 9019 Motion”). A hearing on approval of the Hilton 9019 Motion is currently scheduled for July 20, 2016.

 

  5. Second Lien RSA Adversary

On August 10, 2015, the Second Priority Noteholders Committee commenced an adversary proceeding (the “Second Lien RSA Adversary”) and filed a related preliminary injunction motion against CEC seeking to obtain declaratory and injunctive relief against what it termed an “unlawful effort to purchase votes” through the Second Lien RSA. See The Official Committee of Second Priority Noteholders v. Caesars Entertainment Corporation, Adversary Case No. 15-00578 (ABG) [Docket Nos. 1, 4]. Preliminary hearings on the matter were held in the Bankruptcy Court on August 12 and 13, 2015. On September 21, 2015, the Second Priority Noteholders Committee and CEC entered into a stipulation dismissing the Second Lien RSA Adversary without prejudice.

 

  6. Intercreditor Litigation

On April 7, 2015, Credit Suisse, solely in its capacity as administrative agent and collateral agent under the Prepetition Credit Agreement and credit agreement agent under the Second Lien Intercreditor Agreement, and at the direction of the “required lenders” as such term is defined in the Prepetition Credit Agreement, filed a complaint (the “Second Lien Intercreditor Lawsuit”) in the Supreme Court of the State of New York, New York County, captioned Credit Suisse AG, Cayman Islands Branch v. Appaloosa Investment Limited Partnership I, et al., against the members of the Second Priority Noteholders Committee and the Petitioning Creditors (collectively, the “Second Lien Defendants”) seeking an end to the Second Lien Defendants’ “past and threatened future violations of the [Second Lien Intercreditor Agreement].” In the Second Lien Intercreditor Lawsuit, Credit Suisse argues, among other things, that (a) the turnover provisions in the Second Lien Intercreditor Agreement provide the First Lien Lenders priority of recovery with respect to collateral, including Common Collateral (as such term is defined in the Second Lien Intercreditor Agreement), (b) the Second Lien Intercreditor Agreement provides the First Lien Lenders with the exclusive right to enforce rights with respect to the Common Collateral until such holders have been paid in full in cash, (c) the Second Lien Intercreditor Agreement expressly prohibits the Second Lien Noteholders from taking any action to challenge or contest the First Lien Lenders’ liens, and (d) the Second Lien Defendants violated these provisions of the Second Lien Intercreditor Agreement by filing the WSFS Delaware Action, initiating the Involuntary Proceeding, and requesting the appointment of an examiner in the Chapter 11 Cases. The Second Lien Intercreditor Lawsuit, among other things, seeks declaratory and injunctive relief, including as to the payment of professional fees as to the Second Priority Noteholders Committee’s professionals.

On May 4, 2015, pursuant to 28 U.S.C. §§ 1334, 1446, 1452, and Bankruptcy Rule 9027, the Second Lien Defendants removed the Second Lien Intercreditor Lawsuit to the United States District Court for the Southern District of New York. On June 6, 2015, Credit Suisse and the Second Lien Defendants filed dueling motions seeking to transfer the Second Lien Intercreditor Lawsuit: Credit Suisse sought return to New York state court, where the Second lien Intercreditor Lawsuit was originally filed, and the Second Lien Defendants sought transfer to the Bankruptcy Court. On September 9, 2015, the District Court for the Southern District of New York granted the Second Lien Defendants’ motion and transferred the Second Lien Intercreditor Lawsuit to the District Court for referral to the Bankruptcy Court. See Credit Suisse AG, Cayman Islands Branch v. Appaloosa Investment L.P. I, 2015 WL 5257003 (S.D.N.Y. Sept. 9, 2015). On September 30, 2015, the Second Lien Intercreditor Lawsuit was referred to the Bankruptcy Court as Adversary Case No. 15-00754. Credit Suisse voluntarily dismissed the case without prejudice on December 23, 2015 [Docket No. 18].

 

  7. The Second Lien Preference Action Adversary

On June 6, 2016, the Debtors commenced an adversary proceeding (the “Second Lien Preference Action Adversary”) against the Second Lien Agent and the indenture trustees for the Debtors’ four series of Second Lien Notes (collectively, the “Second Lien Parties”) to avoid liens on commercial tort claims (“Commercial Tort Claims”)

 

98


granted to the Second Lien Parties on November 25, 2014, which liens were perfected by the filing of UCC-1 financing statements on November 26, 2014 (the purported granting of a perfected lien in the Commercial Tort Claims referred collectively as the “Transfer”). By the Second Lien Preference Action Adversary, the Debtors assert that the Transfer is a preferential transfer made to a creditor on account of an antecedent debt when the Debtors were insolvent within 90 days of the Petition Date and is an avoidable preference under section 547 of the Bankruptcy Code. See Bankruptcy Code § 547(b). The Second Lien Preference Action Adversary remains pending as of the date hereof.

 

  T. Other Pending Litigation Proceedings

The Debtors are parties to a number of lawsuits, legal proceedings, collection proceedings, and claims arising out of their business operations, including those lawsuits and other actions described more fully herein. The Debtors cannot predict with certainty the outcome of these lawsuits, legal proceedings, and claims.

With certain exceptions, the filing of the Chapter 11 Cases operates as a stay with respect to the commencement or continuation of litigation against the Debtors that was or could have been commenced before the commencement of the Chapter 11 Cases. In addition, the Debtors’ liability with respect to litigation stayed by the commencement of the Chapter 11 Cases is generally subject to discharge, settlement, and release upon confirmation of a plan under chapter 11, with certain exceptions. Therefore, certain litigation Claims against the Debtors may be subject to discharge in connection with the Chapter 11 Cases.

 

  U. Monetizing the Former Harrah’s Tunica Property

As more fully disclosed in the Debtors’ motion to dismantle the barges that were formerly used to operate the now-closed Harrah’s Tunica casino property [Docket No. 599] (the “Dismantlement Motion”), the Debtors have been actively marketing the Harrah’s Tunica property since 2012. Shortly after the filing of the Chapter 11 Cases, the Debtors, in their business judgment, embarked on a multi-phase effort to repurpose the Harrah’s Tunica property to make it more marketable to potential buyers, including those who were not interested in operating a casino. First, the Debtors obtained entry of an order [Docket No. 1021] approving the Dismantlement Motion, which permitted the Debtors to liquidate the barges housing the former casino at the property. Next, with this property and its attendant costs soon to be removed, the Debtors have been able to focus on the next phase of their process—a formal marketing and sale process with respect to the remainder of the assets located at the former Harrah’s Tunica location (the “Tunica Property”). By selling the Tunica Property through a formal marketing and auction process conducted pursuant to section 363 of the Bankruptcy Code, the Debtors believe they can achieve the most value-maximizing result for benefit of all of the Debtors’ Estates. Selling the Tunica Property will also unburden the Debtors of significant ongoing carrying costs, which currently total approximately $1 million per month. After months of negotiations, the Debtors entered into a purchase agreement with TJM Properties, Inc. (“TJM”) to sell the Tunica Property for $3 million, subject to higher or better offers. Importantly, as part of this agreement, TJM agreed to be the stalking horse in a competitive bidding process. On September 5, 2015, the Debtors filed a motion seeking approval of bidding procedures for a formal marketing and auction process for the Tunica Property with the stalking horse bid as the baseline bid [Docket No. 2172] (the “Tunica Sale Motion”). On September 29, 2015, the Bankruptcy Court entered an order [Docket No. 2358] approving the Debtors’ proposed bidding procedures and auction process. No qualified bids were submitted on or before the bidding deadline. Accordingly, the Debtors filed a notice of cancellation of the auction and designation of the stalking horse bidder as the successful bidder on October 26, 2015 [Docket No. 2500]. On November 2, 2015, the Bankruptcy Court entered an order authorizing the Debtors to sell the Tunica Property to TJM [Docket No. 2524] (the “Tunica Sale Order”). The Debtors closed the sale of the Tunica Property to TJM on January 20, 2016.

 

  V. Workload Bonus Program

On July 1, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order (A) Authorizing and Approving the Workload Bonus Program for Certain Non-Insider Employees and (B) Granting Related Relief [Docket No. 1851] (the “Workload Bonus Motion”). Among other things, the Workload Bonus Motion sought the Bankruptcy Court’s approval of an award pool totaling approximately $550,000 to reward 22 key, non-insider CES employees. Under the bonus program outlined in the Workload Bonus Motion, each program participant (depending on position and workload) would be eligible to receive up to 15 or 30 percent of such participant’s base salary in additional cash awards. On July 27, 2015, the Bankruptcy Court entered an order [Docket No. 1975] approving the relief sought by the Workload Bonus Motion.

 

99


  W. Rejection and Assumption of Executory Contracts and Unexpired Leases

Prior to the Petition Date and in the ordinary course of business, the Debtors entered into thousands of Executory Contracts and Unexpired Leases. The Debtors have reviewed and will continue to review during the Chapter 11 Cases such Executory Contracts and Unexpired Leases to identify contracts and leases for either assumption or rejection.

To date, the Debtors have filed five omnibus motions (the “Contract Rejection Motions”) seeking to reject a total of fifteen Executory Contracts in the aggregate [Docket Nos. 378, 666, 1175, 1755, 1863]. The Bankruptcy Court approved the relief sought in these motions with respect to twelve of these Executory Contracts in several orders [Docket Nos. 641, 990, 1323, 1801, 1928]. The Debtors withdrew the applicable Contract Rejection Motion with respect to one of the Executory Contracts61 following a consensual renegotiation of its terms and conditions. In addition, the Debtors have continued the applicable Contract Rejection Motion [Docket No. 1755] (the “Seibel Rejection Motion”) with respect to two of the Executory Contracts with entities affiliated with Rowen Seibel in connection with the Gordon Ramsay Pub and Grills located at Caesars Palace and Caesars Atlantic City.62 The Debtors, FERG, and LLTQ have been engaged in ongoing settlement discussions and discovery related to the Seibel Rejection Motion since its filing in June 2015. FERG and LLTQ have also filed a motion seeking payment of administrative expenses related to the Gordon Ramsay Pub and Grills [Docket No. 2531] (the “Seibel Admin Motion”), which also remains pending as of the date hereof. Relatedly, on January 14, 2016, the Debtors filed a motion seeking to reject two restaurant license agreements with Gordon Ramsey and his affiliated entities and enter into new agreements that provide additional annual savings to the Debtors [Docket No. 3000] (the “Ramsay Motion”). FERG and LLTQ objected to the Ramsay Motion as well. Discovery related to the Seibel Rejection Motion, the Seibel Admin Motion, and the Ramsay Motion are ongoing pursuant to an agreed discovery order entered by the Bankruptcy Court on March 14, 2016 [Docket No. 3393], and each motion is set for status at the omnibus hearing scheduled for July 20, 2016.

On April 15, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Extending the Time Within Which the Debtors Must Assume or Reject Unexpired Leases of Nonresidential Real Property and (II) Granting Related Relief [Docket No. 1176], whereby the Debtors requested a 90-day extension to assume or reject unexpired leases of nonresidential real property through and including August 13, 2015. On May 7, 2015, the Bankruptcy Court entered an order granting the relief requested therein [Docket No. 1474], which extended the time by which the Debtors must assume or reject such leases until August 13, 2015 (the “Section 365(d)(4) Deadline”).

The Debtors, with the assistance of their advisors, thereafter spent significant time carefully reviewing their unexpired leases which may be subject to the Section 365(d)(4) Deadline. The Debtors identified approximately 53 such leases and considered a variety of factors in determining whether to assume, reject, or seek a further extension with respect to such leases, including whether the lease: (a) is operationally indispensable; (b) generates a net economic benefit for the Debtors’ Estates (e.g., whether the related hotel and/or casino is profitable); (c) contains market or fair and reasonable terms under the circumstances; (d) counterparty has recently renegotiated, or refused to renegotiate, the lease on more favorable terms; (e) is replaceable by another lease, including the costs associated with such replacement; (f) has strategic or intrinsic real estate value; (g) supports services that are standard to, if not necessary to remain competitive in, the gaming industry; and (h) has any defaults to cure and the costs thereof. On

 

61  That contract is that certain Development and Operating Agreement, dated as of June 5, 2006, by and between Payard Management, LLC and Desert Palace, Inc. (as amended, restated, or otherwise supplemented from time to time, the “Payard Agreement”).
62  These contracts are: (a) that certain Consulting Agreement, dated as of May 16, 2014, by and between FERG, LLC (“FERG”) and Boardwalk Regency Corporation d/b/a Caesars Atlantic City (as amended, restated, or otherwise supplemented from time to time, the “FERG Consulting Agreement”) and (b) that certain Development and Operation Agreement, dated as of April 4, 2012, by and between LLTQ Enterprises, LLC (“LLTQ”) and Desert Palace, Inc. (as amended, restated, or otherwise supplemented from time to time, the “LLTQ Development Agreement,” and together with the FERG Consulting Agreement, the “Restaurant Agreements”).

 

100


July 30, 2015 the Debtors filed the Debtors’ Motion for the Entry of an Order (I) Authorizing (A) Assumption of Certain Nonresidential Real Property Leases, (B) Rejection of Certain Nonresidential Real Property Leases Nunc Pro Tunc to July 31, 2015, and (C) Consensual Extensions of Time to Assume or Reject of Certain Nonresidential Real Property Leases, and (II) Granting Related Relief [Docket No. 1984] (the “Unexpired Leases Motion”), which sought to assume thirty-one unexpired leases, reject two unexpired leases, and further extend (with written consent from the applicable lease counterparty) the Section 365(d)(4) Deadline with respect to twenty unexpired leases. On August 12, 2015, the Bankruptcy Court entered an order granting the relief requested in the Unexpired Leases Motion other than with respect to two unexpired leases where the Unexpired Leases Motion was continued by agreement between the Debtors, the Unsecured Creditors Committee, and the Second Priority Noteholders Committee [Docket No. 2056]. The Bankruptcy Court entered an order authorizing the Debtors to assume and assign the remaining two leases on November 17, 2015 [Docket No. 2604]. The Debtors have continued to analyze their unexpired leases and have filed two additional motions related thereto. First, on November 20, 2015, the Debtors filed a motion to assume and assign a nonresidential real property lease to CES [Docket No. 2674], which motion was granted by the Bankruptcy Court on December 14, 2015 [Docket No. 2716]. Second, on January 28, 2016, the Debtors filed a motion to reject a burdensome lease with the Board of Levee Commissioners for the Yazoo-Mississippi Delta related to the former Harrah’s Tunica Casino property [Docket No. 3153], which motion was granted by the Bankruptcy Court on February 12, 2016 [Docket No. 3258].

The Debtors estimate they have obtained at least $15.4 million in annual savings from the various Contract Rejection Motions, through the assignment of certain leases to CES, and through the rejection of certain unexpired nonresidential real property leases.

The Debtors intend to include information in the Plan Supplement regarding the assumption or rejection of the remainder of their Executory Contracts and Unexpired Leases to be carried out as of the Effective Date, but may also elect to file additional discrete motions seeking to assume or reject various of the Debtors’ Executory Contracts and Unexpired Leases before such time.

 

  X. Postpetition Letter of Credit Facility

Like many large companies, the Debtors require letters of credit to comply with certain laws and regulations. As stated above, as of the Petition Date, the Debtors had approximately $101.3 million in letters of credit (the “LCs”) issued by Bank of America, N.A. (as former agent for the Prepetition Credit Agreement) and Credit Suisse (as current agent under the Prepetition Credit Agreement). After the Petition Date, approximately $36.8 million of the letters of credit issued and outstanding under the Prepetition LC Facility expired and were drawn upon, transferred to non-Debtor CEOC affiliates or property owners, or replaced with cash deposits. Approximately 22 letters of credit totaling approximately $64.5 million remained outstanding, however, and approximately 88.9 percent of such amount was due to expire before June 30, 2015. As such, and because the applicable regulations generally require the Debtors to maintain letters of credit or replace them upon notice of non-renewal, the Debtors entered into negotiations with Credit Suisse to secure Credit Suisse’s agreement to continue issuing letters of credit so that CEOC would remain in compliance with the regulations and agreements.

On May 6, 2015, the Debtors filed the Debtors’ Motion for Entry of an Order (I) Authorizing Debtor Caesars Entertainment Operating Company, Inc. to Enter Into a Letter of Credit Agreement, (II) Modifying the Automatic Stay to Permit Implementation of that Agreement, and (III) Granting Related Relief [Docket No. 1471] (the “LC Motion”) seeking Bankruptcy Court’s authorization to enter into that certain Letter of Credit Reimbursement and Security Agreement (the “LC Agreement”), by and between CEOC and Credit Suisse, attached to the LC Motion. The LC Agreement represented more than a month’s worth of good-faith negotiations between the Debtors and Credit Suisse and, as more fully described in the LC Motion, preserved CEOC’s flexibility in accommodating the replacement of expiring letters of credit while avoiding disruptions to operations that would unnecessarily distract management and complicate the Debtors’ restructuring efforts. After further negotiations between the Debtors and their stakeholders, on May 22, 2015, Bankruptcy Court granted the relief sought in the LC Motion [Docket No. 1671] and CEOC entered into the LC Agreement shortly thereafter. The LC Agreement was amended to extend its maturity date an additional 15 months on May 2, 2016 [Docket No. 3623].

 

101


  Y. Debtors’ Monthly Operating Reports

The Debtors have filed thirteen monthly operating reports for February 2015 through April 2016 [Docket Nos. 1039, 1406, 1724, 1853, 1986, 2137, 2373, 2517, 2670, 2849, 3159, 3327, 3458, 3614, and 3838]. Net revenue for the period from the Petition Date through April 30, 2016 totaled $5.23 billion. Operating expenses during this period with respect to the casinos were $4.47 billion. The Debtors reported $752 million in income from operations for this period. As of April 30, 2016, the Debtors hold unrestricted cash on the consolidated balance sheet in the amount of $1.07 billion and liabilities subject to compromise were $18.88 billion.

ARTICLE V.

SUMMARY OF THE PLAN

The Debtors believe that the Plan maximizes the value of their two major assets—their business and their estate causes of actions against CEC and certain of its affiliates.

To maximize the value of their businesses, the Debtors will reorganize into a real estate investment trust structure that will enable them to unlock substantial value for the benefit of their stakeholders given the relatively favorable valuations associated with such entities as opposed to traditional gaming companies. Under this structure, the Debtors will be split into two separate companies—OpCo and PropCo. Subject to certain exclusions, the Debtors will contribute substantially all of their U.S.-based real property assets to PropCo (including PropCo subsidiaries) (the “Contributed Properties”), and PropCo will lease back most of those assets to OpCo in exchange for annual lease payments on the terms set forth in the Master Lease Agreements. Preliminary lists of such properties are attached as Exhibits A–D to the Lease Term Sheet attached as Exhibit C to the Plan. These lists remain subject to revision in all respects and final lists will be included as part of the Plan Supplement. As discussed in greater detail below, the Debtors’ contribution of real property assets to PropCo will be completed through either the Spin Structure or the Partnership Contribution Structure. The REIT will hold and control (either directly or indirectly) the general partnership interest in PropCo, and will also hold limited partnership interests in PropCo.

To maximize the value of their estate causes of action against CEC and certain of its affiliates, and as discussed in greater detail above, the Special Governance Committee undertook a comprehensive independent investigation into the viability of such claims. The Special Governance Committee assessed the merits of multiple potential claims, weighed the probability of successfully litigating such claims, and analyzed the attendant litigation, execution, and business risks and costs. The Special Governance Committee then leveraged this information in negotiations to extract significant contributions from CEC and its affiliates that drive increased recoveries (both cash and noncash) under the Plan and provide important credit support to various OpCo obligations. But this consideration is contingent on a global settlement and release of claims against CEC and its affiliates, including claims held by both Debtors and third parties. The Debtors believe, in light of the foregoing, that the global settlement embodied by the Plan and the related releases are fair, reasonable, and in the best interests of the Debtors’ Estates. Indeed, such releases are necessary for the Debtors’ proposed reorganization because without them there would be no contributions from CEC to drive the significantly enhanced recoveries on which the Plan is premised.

 

  A. Proposed Treatment of Each Class of Claims and Interests

As set forth in Article III of the Plan and in accordance with sections 1122 and 1123(a)(1) of the Bankruptcy Code, all Claims and Interests (other than Administrative Claims, Priority Tax Claims, and Professional Fee Claims, which are unclassified Claims under the Plan) are classified into Classes for all purposes, including voting, Confirmation, and distributions pursuant to the Plan. A Claim or Interest is classified in a particular Class only to the extent that the Claim or Interest qualifies within the description of that Class. A Claim or Interest is also classified in a particular Class for the purpose of receiving distributions pursuant to the Plan only to the extent that such Claim or Interest is an Allowed Claim or Allowed Interest in that Class and has not been paid, released, or otherwise satisfied prior to the Effective Date.

 

102


  1. Unclassified Claims

In accordance with section 1123(a)(1) of the Bankruptcy Code, the Plan does not classify Administrative Claims, Priority Tax Claims, or Professional Fee Claims and, thus, Article III of the Plan does not include such Claims in the Classes of Claims set forth therein. Instead, Article II of the Plan provides for the satisfaction of these unclassified Claims. The treatment and the projected recoveries under the Plan of these unclassified Claims, which are not entitled to vote on the Plan, are described in summary form below for illustrative purposes only.

 

Unclassified Claim

   Plan Treatment    Estimated Amount and
Number of Allowed
Claims63
   Estimated Percent
Recovery Under the
Plan

Administrative Claims

   Unimpaired    $0.5–12.9
1800 Claims
   100%

Priority Tax Claims64

   Unimpaired    $0.5–1.1
50 Claims
   100%

Professional Fee Claims65

   Unimpaired    $58–68
15 Claims
   100%

 

  2. Classified Claims

The table below summarizes the classification and treatment of all classified Claims against and Interests in each Debtor (as applicable) under the Plan.66 The ability of a Holder of Claims or Interests to vote on, and such Holder’s distribution under, the Plan, if any, depends on the type of Claim or Interest held by such Holder (if any) and the treatment afforded any such Claim or Interest. The classification, treatment, voting rights, and projected recoveries of classified Claims are described in summary form below for illustrative purposes only, and are subject to material change.

In particular, recoveries available to the Holders of Claims in Classes D–P are estimates and actual recoveries may materially differ based on, among other things, whether the amount of Claims actually Allowed against the applicable Debtor exceed the estimates provided below and the actual market value of non-cash recoveries. Furthermore, the following estimated recoveries may be materially reduced or altered if: (a) the NRF is found to have an Allowed $362 million joint and several liability claim at each of the Debtors; and (b) the Holders of Class E Secured First Lien Notes Claims do not waive their deficiency claims as contemplated by the Plan and the RSAs.

 

63  All dollar amounts in millions.
64  The Louisiana Department of Revenue disputes this estimate and believes the Priority Tax Claim amount may be higher than estimated.
65  The Professional Fee Claims set forth herein and in the Plan constitute the estimated unpaid Professional Fee Claims as of a hypothetical Effective Date of December 31, 2016, and this estimate is nonbinding and is subject to material revision.
66  The Debtors reserve the right to separately classify Claims to the extent necessary to comply with any requirements under the Bankruptcy Code or applicable law.

 

103


Class

   Type of Claim or
Interest
   Status    Estimated
Amount and
Number of
Allowed Claims
or Interests67
   Estimated Percent
Recovery Under the Plan

Class A
(Each Debtor)

   Secured Tax Claims    Unimpaired

(Deemed to
Accept)

   <$0.1

1 Claim

   100%

Class B
(Each Debtor)

   Other Secured Claims    Unimpaired

(Deemed to
Accept)

   $45.9
50 Claims
   100%

Class C
(Each Debtor)

   Other Priority Claims    Unimpaired
(Deemed to
Accept)
   $1.0–1.2

50 Claims

   100%

Class D
(Each Debtor other than Non-Obligor Debtors)

   Prepetition Credit
Agreement Claims
   Impaired

(Entitled to Vote)

   $5,425.368

3 Claims

   Class F Rejects: 113%–117%

Class F Accepts: 112–115%

Class E
(Each Debtor other than Non-Obligor Debtors)

   Secured First Lien
Notes Claims
   Impaired

(Entitled to Vote)

   $6,528.969

1 Claim

   Class F Rejects: 96%–128%

Class F Accepts: 94%–124%

Class F
(Each Debtor other than Non-Obligor Debtors)

   Second Lien Notes
Claims
   Impaired

(Entitled to Vote)

   $5,522.570

3 Claims

   Accept: 29%–48%

Reject: 22%–34%

Class G
(CEOC and Each Subsidiary Guarantor)

   Subsidiary-Guaranteed
Notes Claims
   Impaired

(Entitled to Vote)

   $501.9

1 Claim

   61%–105%

  

 

67  All dollar amounts in millions.
68  The Prepetition Credit Agreement Claims reflect Claims on account of: (a) $378,166,594.40 on account of Term B-4 Loans; (b) $939,637,725.29 on account of Term B-5 Loans; (c) $2,304,615,275.40 on account of Term B-6 Loans; (d) $1,747,380,651.04 on account of Term B-7 Loans; (e) $25,434,935.15 on account of the Swap and Hedge Claims owned by Goldman Sachs; (f) $17,312,091.66 on account of a CEC guaranty of certain Swap and Hedge Claims on which the Debtors defaulted; and (g) $12,644,732.82 on account of draws on letters of credit issued under Prepetition Credit Agreement.
69  Secured First Lien Notes Claims reflect Claims on account of three tranches of Secured First Lien Notes: (a) $1,293,975,694.56 on account of notes issued under the 8.50% First Lien Notes Indenture; (b) $3,111,750,000.00 on account of notes issued under the 9.00% First Lien Notes Indentures; and (c) $2,123,151,562.50 on account of notes issued under the 11.25% First Lien Notes Indenture.
70  The Second Lien Notes Claims reflect Claims on account of four tranches of Second Lien Notes: (a) $3,882,005.83 on account of notes due 2015 issued under the 10.00% Second Lien Notes Indentures; (b) $850,804,903.01 on account of notes due 2018 issued under the 10.00% Second Lien Notes Indentures; (c) $773,640,625.00 on account of notes issued under the 12.75% Second Lien Notes Indenture; and (d) $3,894,171,356.11 on account of additional notes due 2018 issued under the 10.00% Second Lien Notes Indentures. As noted above, if the OID Objection is successful it would reduce the aggregate allowed amount of the Second Lien Notes Claims to approximately $3.7 billion. SeeArticle IV.P.2.

 

104


Class

   Type of Claim or
Interest
   Status    Estimated
Amount and
Number of
Allowed Claims
or Interests
   Estimated Percent
Recovery Under the Plan

Class H
(CEOC)

   Senior Unsecured
Notes Claims71
   Impaired

(Entitled to Vote)

   $536.172

2 Claims73

   Accept: 33%–56%

Reject: 22%–33%

Class I
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   Undisputed Unsecured
Claims
   Impaired

(Entitled to Vote)

   $92.0

100 Claims

   Accept: 34%–54%

Reject: 22%–33%

Class J
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   Disputed Unsecured
Claims
   Impaired

(Entitled to Vote)

   $124.1–161.1

1,900 Claims

   34%–54%

Class K
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   Convenience
Unsecured Claims
   Impaired

(Entitled to Vote)

   $23.8–26.8

3,000 Claims

   46%

Class L
(Each Debtor other than Non-Obligor Debtors and the BIT Debtors)

   Insurance Covered
Unsecured Claims
   Impaired

(Entitled to Vote)

   $13.5–15.0

650 Claims

   34%–54%

Class M
(Each Par Recovery Debtor)

   Par Recovery
Unsecured Claims
   Impaired

(Entitled to Vote)

   $43.5–51.0

2,200 Claims

   100%

Class N
(Winnick Holdings, LLC)

   Winnick Unsecured
Claims
   Impaired

(Entitled to Vote)

   <$0.1

10 Claims

   67%

Class O
(Caesars Riverboat Casino, LLC)

   Caesars Riverboat
Casino Unsecured
Claims
   Impaired

(Entitled to Vote)

   $2.5–2.9

250 Claims

   71%

Class P
(Chester Downs Management Company, LLC)

   Chester Downs
Management
Unsecured Claims
   Impaired

(Entitled to Vote)

   $1.2-1.5

100 Claims

   87%

Class Q
(Each Non-Obligor Debtor)

   Non-Obligor
Unsecured Claims
   Unimpaired

(Deemed to
Accept)

   $4.3–4.9

300 Claims

   100%

 

71  The estimated amount of Unsecured Claims included herein includes the amount of Senior Unsecured Notes that CAC will waive pursuant to the terms of the Plan.
72  The Senior Unsecured Notes Claims reflect Claims on account of two tranches of Senior Unsecured Notes: (a) $298,999,140.63 on account of notes issued under the 6.50% Senior Unsecured Notes Indenture; and (b) $237,145,295.10 on account of notes issued under the 5.75% Senior Unsecured Notes Indenture.
73  Pursuant to a list of non-objecting beneficial holders of Senior Unsecured Notes as of February 23, 2016, obtained by the Debtors, there were approximately 1068 non-objecting beneficial holders of the Senior Unsecured Notes as of that date. This number may have materially changed since that time, and the Debtors do not have more recent numbers at this time.

 

105


Class

   Type of Claim or
Interest
   Status    Estimated
Amount and
Number of
Allowed Claims
or Interests67
   Estimated Percent
Recovery Under the Plan

Class R
(Each Debtor)

   Section 510(b) Claims    Impaired

(Deemed to
Reject)

   $0.0

0 Claims

   0%

Class S
(Each Debtor)

   Intercompany Claims    Impaired

(Deemed to
Reject)

   $0.0–4,894.4

15 Claims

   0%74

Class T
(Each Debtor)

   Intercompany Interests    Impaired

(Deemed to
Reject)

   $0.0

0 Claims

   0%–100%

Class U
(CEOC)

   CEOC Interests    Impaired

(Deemed to
Reject)

   $0.0

0 Claims

   0%

Class V
(Des Plaines Development Limited Partnership)

   Des Plaines Interests    Unimpaired

(Deemed to
Accept)

   $0.0

0 Claims

   100%

 

  B. Proposed Distributions to Holders of Allowed Claims and Interests

The Plan contemplates the following distributions to Holders of Allowed Claims and Interests, among other recoveries:

 

Claim Holders

  

Summary of Plan Distributions

Holders of Secured Tax Claims

 

(Class A)

   Unimpaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent a Holder of an Allowed Secured Tax Claim agrees to less favorable treatment, each such Holder will receive, at the option of the Reorganized Debtors: (a) payment in full in Cash of such Holder’s Allowed Secured Tax Claim as of the Effective Date or as soon as reasonably practicable thereafter or (b) equal semi-annual Cash payments commencing as of the Effective Date or as soon as reasonably practicable thereafter and continuing for five years, in an aggregate amount equal to such Allowed Secured Tax Claim, together with interest at the applicable non-default contract rate under non-bankruptcy law, subject to the option of the Reorganized Debtors to prepay the entire amount of such Allowed Secured Tax Claim during such time period.

Holders of Other Secured Claims

 

(Class B)

   Unimpaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent a Holder of an Allowed Other Secured Claim agrees to less favorable treatment, each such Holder will receive, at the option of the Reorganized Debtors: (a) payment in full in Cash of such Holder’s Allowed Other Secured Claim; (b) Reinstatement of such Holder’s Allowed Other Secured Claim; (c) the collateral securing such Holder’s Allowed Other Secured Claim; or (d) such other treatment rendering such Holder’s Allowed Other Secured Claim Unimpaired.

 

74  The Plan provides that Intercompany Claims will be cancelled and no distributions will be made, but provides the Reorganized Debtors the ability to reconcile such Intercompany Claims as may be advisable in order to avoid the incurrence of any past, present, or future tax or similar liabilities by the Reorganized Debtors.

 

106


Claim Holders

  

Summary of Plan Distributions

Holders of Other Priority Claims

 

(Class C)

   Unimpaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent a Holder of an Allowed Other Priority Claim agrees to less favorable treatment, each such Holder will receive, at the option of the Reorganized Debtors: (a) payment in full in Cash on the later of the Effective Date and the date such Other Priority Claim becomes an Allowed Other Priority Claim or as soon as reasonably practicable thereafter; or (b) such other treatment rendering such Holder’s Allowed Other Priority Claim Unimpaired.

Holders of Prepetition Credit Agreement Claims

 

(Class D)

  

Impaired. On the Effective Date, except to the extent a Holder of an Allowed Prepetition Credit Agreement Claim agrees to less favorable treatment, and subject to any increases in connection with an Improved Bank Recovery Event, each such Holder will receive its Pro Rata share of:75

 

•    $705 million in Cash, minus any Cash amounts up to $300 million paid by the Debtors prior to the Effective Date pursuant to an order of the Bankruptcy Court authorizing such earlier payment (provided, for the avoidance of doubt, that such $300 million payment shall not include the adequate protection payments authorized pursuant to the Cash Collateral Order);

 

•    $882 million of additional Cash out of the proceeds of the syndication of the OpCo First Lien Debt to third parties, provided, however, that solely to the extent that the OpCo First Lien Debt is not fully syndicated and solely to the extent that the Requisite Consenting Bank Creditors waive such requirement in their sole discretion as set forth in Article IX.B of the Plan, such Holder will receive such Holder’s Pro Rata share of the OpCo First Lien Term Loan issued in an aggregate principal amount equal to the amount of the unsubscribed portion of the OpCo First Lien Debt in lieu of such Cash on a dollar-for-dollar basis;

 

•    $406 million of additional Cash out of the proceeds of the issuance of OpCo Second Lien Debt to third parties, provided, however, that solely to the extent that the OpCo Second Lien Debt is not fully syndicated and solely to the extent that the Requisite Consenting Bank Creditors waive such requirement in their sole discretion as set forth in Article IX.B of the Plan, such Holder will receive such Holder’s Pro Rata share of the OpCo Second Lien Notes issued in an aggregate principal amount equal to the amount of the unsubscribed portion of the OpCo Second Lien Debt in lieu of such Cash on a dollar-for-dollar basis;

 

•    $1,961 million aggregate principal amount of the PropCo First Lien Term Loan, subject to the right to elect to receive PropCo Common Equity rather than such PropCo First Lien Term Loan pursuant to the PropCo Equity Election;

 

•    $1,450 million of (A) the PropCo Second Lien Upsize Amount (subject to the right to elect to receive PropCo Common Equity rather than the PropCo Second Lien Notes issued pursuant to the PropCo Second Lien Upsize Amount pursuant to the PropCo Equity Election), if any, and (B) additional Cash in the amount of the difference between (I) $1,450 million minus (II) the amount of the PropCo Second Lien Upsize Amount; provided that such Holder shall receive an equivalent principal

 

75 An “Improved Bank Recovery Event” means, subject to the Bank RSA remaining in effect, if and to the extent the consideration being received by the Holders of Secured First Lien Notes Claims (from any source) is increased as compared to the treatment provided to such Holders in the June 6 Plan, the increase of the consideration (to be funded by CEC or New CEC) to the Holders of Prepetition Credit Agreement Claims by the same amount of consideration and subject to the same terms of any such increase to the Holders of Secured First Lien Notes Claims, provided, however, that the foregoing Improved Bank Recovery Event shall not apply with respect to an increase in the Additional CEC Bond Consideration.

 

107


Claim Holders

  

Summary of Plan Distributions

  

amount of CPLV Mezzanine Debt instead of the PropCo Second Lien Upsize Amount if Class D elects (on the Class D Ballot) as a Class (on majority vote based solely on principal amount of Prepetition Credit Agreements Claims held) to cause the CPLV Mezzanine Election to occur pursuant to the Prepetition Credit Agreement CPLV Option Procedures;

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for either (A) solely if Class F votes to reject the Plan, 5% of New CEC Common Equity or (B) solely if Class F votes to accept the Plan, 4% of New CEC Common Equity, in both instances on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise); and

 

•    solely if Class F votes to accept the Plan, the Additional CEC Bank Consideration (i.e., an amount equal to $10,000,000 per month (which shall be fully earned on the first day of each month) earned from January 1, 2017, through the earlier of (a) the Effective Date or (b) June 30, 2017, which amount New CEC shall contribute to the Debtors on the Effective Date and which shall be payable in (x) Cash and/or (y) New CEC Common Equity (at a price per share of New CEC Common Equity using an implied equity value for New CEC of $6.5 billion), which shall be issued in exchange for OpCo Series A Preferred Stock pursuant to the CEOC Merger).

Holders of Secured First Lien Notes Claims

 

(Class E)

  

Impaired. On the Effective Date, except to the extent a Holder of an Allowed Secured First Lien Notes Claim agrees to less favorable treatment, each such Holder will receive its Pro Rata share of:

 

•    $700 million in Cash, minus any Cash amounts up to $103.5 million paid by the Debtors prior to the Effective Date pursuant to an order of the Bankruptcy Court authorizing such earlier payment (provided, for the avoidance of doubt, that such $103.5 million payment shall not include the adequate protection payments authorized pursuant to the Cash Collateral Order);

 

•    $306 million of Cash out of the proceeds of the issuance of the OpCo First Lien Debt to third parties, provided, however, that solely to the extent that the OpCo First Lien Debt is not fully syndicated and solely to the extent that the Requisite Consenting Bond Creditors waive such requirement in their sole discretion as set forth in Article IX.B of the Plan, such Holder will receive such Holder’s Pro Rata share of the OpCo First Lien Notes issued in an aggregate principal amount equal to the amount of the unsubscribed portion of the OpCo First Lien Debt in lieu of such Cash on a dollar-for-dollar basis;

 

•    $141 million of Cash out of the proceeds of the issuance of the OpCo Second Lien Debt to third parties, provided, however, that solely to the extent that the OpCo Second Lien Debt is not fully syndicated and solely to the extent that the Requisite Consenting Bond Creditors waive such requirement in their sole discretion as set forth in Article IX.B of the Plan, such Holder will receive such Holder’s Pro Rata share of the OpCo Second Lien Notes issued in an aggregate principal amount equal to the amount of the unsubscribed portion of the OpCo Second Lien Debt in lieu of such Cash on a dollar-for-dollar basis;

 

108


Claim Holders

  

Summary of Plan Distributions

  

•    $431 million aggregate principal amount of the PropCo First Lien Notes, subject to the right to elect to receive PropCo Common Equity rather than such PropCo First Lien Notes pursuant to the PropCo Equity Election;

 

•    $1,425 million, consisting of a combination of (A) aggregate principal amount of PropCo Second Lien Notes (subject to the right to elect to receive PropCo Common Equity rather than such PropCo Second Lien Notes pursuant to the PropCo Equity Election), and (B) Cash equal to the excess (if any) of (I) $250 million over (II) the aggregate principal amount of CPLV Mezzanine Debt allocated to Holders of Secured First Lien Notes Claims pursuant to Article IV.A.3 of the Plan (prior to giving effect to any CPLV Mezzanine Equitized Debt);

 

•    the PropCo Preferred Equity Distribution, subject to the PropCo Preferred Equity Put Right and the PropCo Preferred Equity Call Right;

 

•    $1,107 million of (A) aggregate principal amount of the CPLV Mezzanine Debt (subject to the right to elect to receive PropCo Common Equity rather than such CPLV Mezzanine Debt pursuant to the PropCo Equity Election) and (B) additional Cash in the amount of the difference between (I) $1,107 million minus (II) the aggregate principal amount of the CPLV Mezzanine Debt (other than any CPLV Mezzanine Debt issued to the holders of Prepetition Credit Agreement Claims pursuant to the CPLV Mezzanine Election) and the PropCo Preferred Equity Upsize Shares;

 

•    either (A) if the Spin Structure is used, 100% of PropCo Common Equity on a fully diluted basis (excluding dilution from PropCo Preferred Equity, if any, and the PropCo Equity Election), or (B) if the Partnership Contribution Structure is used, (I) 95% of PropCo Common Equity on a fully diluted basis (excluding dilution from PropCo Preferred Equity, if any, and the PropCo Equity Election) and (II) $91 million in Cash;

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for either (A) solely if Class F votes to reject the Plan, 15.8% of New CEC Common Equity or (B) solely if Class F votes to accept the Plan, 12.5% of New CEC Common Equity, in both instances on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise); and

 

•    solely if Class F votes to accept the Plan, the Additional CEC Bond Consideration (i.e., to the extent that the Effective Date shall not have occurred on or before May 1, 2017, New CEC shall (a) contribute to the Debtors on the Effective Date Cash in the amount of $20,000,000 per month and/or (b) issue New CEC Common Equity (at a price per share of New CEC Common Equity using an implied equity value for New CEC of $6.5 billion) of a value equal to $20,000,000 per month (which shall be issued in exchange for OpCo Series A Preferred Stock pursuant to the CEOC Merger), in both instances commencing on May 1, 2017, and ending on the Effective Date, which amount shall be prorated for any partial month.).

 

109


Claim Holders

  

Summary of Plan Distributions

Holders of Second Lien Notes Claims

 

(Class F)

  

Impaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent that a Holder of an Allowed Second Lien Notes Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Second Lien Notes Claim, and subject to any Reduced Claim Adjustment each such Holder shall receive:76

 

•    if Class F votes to accept the Plan, their Pro Rata share of the following:

 

•    $790,980,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 9.646% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 17.435% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

 

•    if Class F votes to reject the Plan, their Pro Rata share of the following:

 

•    $790,980,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 9.646% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 8.939% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

Holders of Subsidiary-Guaranteed Notes Claims

 

(Class G)

   Impaired. On the Effective Date, except to the extent that a Holder of an Allowed Subsidiary-Guaranteed Notes Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Subsidiary-Guaranteed Notes Claim, and subject to any Improved Recovery Event,77 each such Holder shall receive its Pro Rata share of the following:

 

76  As noted above, if the OID Objection is successful it would reduce the aggregate allowed amount of the Second Lien Notes Claims to approximately $3.7 billion. SeeArticle IV.P.2. A “Reduced Claim Adjustment” means, in the event that any portion of the principal amount of Second Lien Notes Claims is disallowed by an order of a court of competent jurisdiction (whether on account of unallowable original issue discount or otherwise), any downward adjustment to the amount of OpCo Series A Preferred Stock (exchangeable pursuant to the CEOC Merger for New CEC Common Equity) available to the Holders of Second Lien Notes Claims to provide (a) the Holders of Senior Unsecured Notes Claims, Undisputed Unsecured Claims, Disputed Unsecured Claims, Convenience Unsecured Claims, and Insurance Covered Unsecured Claims in each of Class H, Class I, Class J, Class K, and Class L, respectively, with improved recoveries equal to the recovery percentage to be received by Class F (as a result of the disallowance of any portion of the principal amount of Second Lien Notes Claims and the reallocation of Securities to provide the increased recovery percentages provided in this clause (a) and the following clause (b)), and (b) the Holders of Subsidiary-Guaranteed Notes Claims in Class G with recoveries increased by the same percentage commensurate with the improved recoveries available to Class H, Class I, Class J, Class K, and Class L in accordance with the foregoing clause (a).
77 As noted above, if the OID Objection is successful it would reduce the aggregate allowed amount of the Second Lien Notes Claims to approximately $3.7 billion. SeeArticle IV.P.2. An “Improved Recovery Event” means, in the event that any portion of the principal amount of Second Lien Notes Claims is disallowed by an order of a court of competent jurisdiction (whether on account of unallowable original issue discount or otherwise), there shall be a reallocation of the amount of OpCo Series A Preferred Stock (exchangeable pursuant to the CEOC Merger for New CEC Common Equity) otherwise available to the Holders of Second Lien Notes Claims to provide an (a) increase in the recoveries to the Holders of Senior Unsecured Notes Claims, Undisputed Unsecured Claims, Disputed Unsecured Claims, Convenience Unsecured Claims, and Insurance Covered Unsecured Claims in each of Class H, Class I, Class J, Class K, and Class L, respectively, to equal the increased recovery percentage to be received by Class F (as a result of the disallowance of any portion of the principal amount of Second Lien Notes Claims and the reallocation of Securities to provide the increased recovery percentages provided in this clause (a) and the following clause (b)), and (b) increase in the recoveries available to the Holders of Subsidiary Guaranteed Notes Claims in Class G to provide such Holders with recoveries increased by the same percentage commensurate with the improved recoveries available to Class H, Class I, Class J, Class K, and Class L in accordance with the foregoing clause (a). For the avoidance of doubt, neither CEC nor New CEC shall fund any additional consideration on account of an Improved Recovery Event but instead such increased recoveries shall come from a reallocation of recoveries available to the Holders of Second Lien Notes Claims on account of a Reduced Claim Adjustment.

 

110


Claim Holders

  

Summary of Plan Distributions

  

•    $116,810,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 1.425% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 4.122% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

Holders of Senior Unsecured Notes Claims

 

(Class H)

  

Impaired. On the Effective Date, except to the extent that a Holder of an Allowed Senior Unsecured Notes Claim agrees to a less favorable treatment (including as set forth in Article IV.A.8 of the Plan), in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Senior Unsecured Notes Claim, and subject to the Improved Recovery Agreement78 and/or any Improved Recovery Event, each such Holder shall receive:

 

•    if Class H votes to accept the Plan, its Pro Rata share of the following:

 

•    $34,820,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 0.425% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 0.992% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

 

78 An “Improved Recovery Agreement” means an agreement among the Unsecured Creditors Committee, CEC, and CEOC (which shall only be effective if the Unsecured Creditors Committee has agreed to a restructuring support agreement with the Debtors and CEC that remains in effect) that to the extent the Holders of Second Lien Notes Claims, in their capacity as such and as a Class or sub-Class, receive a recovery percentage under the Plan or through some other agreement with the Debtors and/or CEC, however funded from any source, greater than the recovery percentage received by the Holders of Claims in Class H (Senior Unsecured Notes Claims), Claims I (Undisputed Unsecured Claims), Class J (Disputed Unsecured Claims), Class K (Convenience Unsecured Claims), and Class L (Insurance Covered Unsecured Claims) under the Plan, in their capacities as such, additional consideration shall be made available (on the same terms as to the Holders of Second Lien Notes Claims in their capacity as such and as a Class or sub-Class) to the Holders of Claims in Class H, Class I, Class J, Class K, and Class L such that their recovery percentage will be equal to the recovery percentage received by such Holders of Second Lien Notes Claims in their capacity as such and as a Class or sub-Class, commensurate with the respective vote of each of Class H, Class I, Class J, Class K, and Class L to accept or reject the Plan, as applicable, provided, however, for the avoidance of doubt, in the event the Holders of Second Lien Notes Claims in their capacity as such and as a Class or sub-Class receive any recovery percentage greater than the recovery percentage received by the Holders of Claims in Class H, Class I, Class J, Class K, and Class L and not contingent upon Plan treatment tied to voting outcomes, then any Plan treatment tied to voting outcomes for Class H, Class I, Class J, Class K, and Class L also shall be eliminated, and the Holders of Claims in such Classes shall receive the greater recovery percentage received by such Holders of Second Lien Notes Claims.

 

111


Claim Holders

  

Summary of Plan Distributions

  

•    if Class H votes to reject the Plan, its Pro Rata share of the following:

 

•    $34,820,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 0.425% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 0.393% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

Holders of Undisputed Unsecured Claims

 

(Class I)

  

Impaired. On the Effective Date, except to the extent that a Holder of an Allowed Undisputed Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Undisputed Unsecured Claim, and subject to the Improved Recovery Agreement and/or any Improved Recovery Event, each such Holder shall receive:

 

•    if Class I votes to accept the Plan:

 

•    recovery equal to 2.0% of such Holder’s Allowed Undisputed Unsecured Claim in Cash from the Unsecured Creditor Cash Pool; and

 

•    recovery equal to 44.0% of such Holder’s Allowed Undisputed Unsecured Claim from the Unsecured Creditor Securities Pool, as such percentage value is determined in the definition thereof.

 

•    if Class I votes to reject the Plan, recovery equal to 30.0% of such Holder’s Allowed Undisputed Unsecured Claim from the Unsecured Creditor Securities Pool

Holders of Disputed Unsecured Claims

 

(Class J)

  

Impaired. Subject to Article VI of the Plan, except to the extent that a Holder of an Allowed Disputed Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Disputed Unsecured Claim, and subject to the Improved Recovery Agreement and/or any Improved Recovery Event, each such Holder shall receive the following:

 

•    its Pro Rata share of Cash from Class J’s share of the Unsecured Creditor Cash Pool up to a recovery equal to 2.0% of such Holder’s Allowed Disputed Unsecured Claim; and

 

•    its Pro Rata share of Class J’s share of the Unsecured Creditor Securities Pool up to a recovery equal to 44.0% of such Holder’s Allowed Disputed Unsecured Claim as such percentage value is determined in the definition thereof.

 

112


Claim Holders

  

Summary of Plan Distributions

Holders of Convenience Unsecured Claims

 

(Class K)

   Impaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent that a Holder of an Allowed Convenience Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Convenience Unsecured Claim, and subject to the Improved Recovery Agreement and/or any Improved Recovery Event, each such Holder shall receive its Pro Rata share of the $12.5 million Convenience Cash Pool up to a recovery equal to 46.0% of such Holder’s Convenience Unsecured Claim.

Holders of Insurance Covered Unsecured Claims

 

(Class L)

  

Impaired. Subject to Article VI of the Plan, except to the extent that a Holder of an Allowed Insurance Covered Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Insurance Covered Unsecured Claim, after accounting for insurance as set forth in Article VI.K of the Plan, and subject to the Improved Recovery Agreement and/or any Improved Recovery Event, each such Holder shall receive its Pro Rata share of:

 

•    its Pro Rata share of Cash from the Unsecured Insurance Creditor Cash Pool up to a recovery equal to 2.0% of such Holder’s Allowed Insurance Covered Unsecured Claim; and

 

•    its Pro Rata share of the Unsecured Insurance Creditor Securities Pool up to a recovery equal to 44.0% of such Holder’s Allowed Insurance Covered Unsecured Claim as such percentage value is determined in the definition thereof.

Par Recovery Unsecured Claims

 

(Class M)

  

Impaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent that a Holder of an Allowed Par Recovery Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Par Recovery Unsecured Claim, each such Holder shall receive recovery in full of its Allowed Par Recovery Unsecured Claim, including Post-Petition Interest, from its Pro Rata share of (but in no event more than payment in full (with Post-Petition Interest)):

 

•    $13,620,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 0.166% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 0.500% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

Winnick Unsecured Claims

 

(Class N)

  

Impaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent that a Holder of an Allowed Winnick Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Winnick Unsecured Claim, each such Holder shall receive its Pro Rata share of:

 

•    $270,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 0.003% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 0.005% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

 

113


Claim Holders

  

Summary of Plan Distributions

Caesars Riverboat Casino Unsecured Claims

 

(Class O)

  

Impaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent that a Holder of an Allowed Caesars Riverboat Casino Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Caesars Riverboat Casino Unsecured Claim, each such Holder shall receive its Pro Rata share of:

 

•    $790,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 0.010% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 0.016% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

Chester Downs Management Unsecured Claims

 

(Class P)

  

Impaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent that a Holder of an Allowed Chester Downs Management Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Chester Downs Management Unsecured Claim, each such Holder shall receive its Pro Rata share of:

 

•    $410,000 aggregate principal amount of New CEC Convertible Notes, which shall be convertible pursuant to the terms of the New CEC Convertible Notes Indenture in the aggregate for up to 0.005% of New CEC Common Equity on a fully diluted basis; and

 

•    OpCo Series A Preferred Stock, which shall be exchanged pursuant to the CEOC Merger for 0.012% of New CEC Common Equity on a fully diluted basis (giving effect to the issuance of the New CEC Convertible Notes but not taking into account any dilution from any New CEC Capital Raise).

Holders of Non-Obligor Unsecured Claims

 

(Class Q)

   Unimpaired. Subject to Article VI of the Plan, on the Effective Date, except to the extent that a Holder of an Allowed Non-Obligor Unsecured Claim agrees to a less favorable treatment, in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange for each Allowed Non-Obligor Unsecured Claim, each such Holder shall receive payment in full, in Cash, of its Allowed Non-Obligor Unsecured Claim, including Post-Petition Interest from the Non-Obligor Cash Pool.

Holders of Section 510(b) Claims

 

(Class R)

   Impaired. Each Holder of a Section 510(b) Claim will not receive any distribution on account of such Section 510(b) Claim.

Holders of Intercompany Claims

 

(Class S)

   Impaired. Intercompany Claims shall not receive any distribution on account of such Intercompany Claims. On or after the Effective Date, the Reorganized Debtors may reconcile such Intercompany Claims as may be advisable in order to avoid the incurrence of any past, present, or future tax or similar liabilities by such Reorganized Debtors.

Holders of Intercompany Interests

 

(Class T)

   Impaired. Intercompany Interests shall be, at the option of the Debtors, either (a) Reinstated as of the Effective Date for the benefit of the Holder thereof in exchange for the Reorganized Debtors’ agreement to provide management services to certain other Reorganized Debtors, and to use certain funds and assets as set forth in the Plan to satisfy certain obligations of such other Reorganized Debtors or (b) cancelled without any distribution on account of such Interests.

 

114


Claim Holders

  

Summary of Plan Distributions

Holders of CEOC Interests

 

(Class U)

   Impaired. CEOC Interests will be discharged, canceled, released, and extinguished as of the Effective Date, and shall be of no further force or effect, and Holders of CEOC Interests will not receive any distribution on account of such CEOC Interests; provided, however, that solely for purposes of effectuating the Plan, the CEOC Interests held by CEC will be Reinstated as OpCo Common Stock.

Holders of Des Plaines Interests

 

(Class V)

   Unimpaired. The legal, equitable, and contractual rights of the Holders of Des Plaines Interests are unaltered by the Plan. The Des Plaines Interests shall be Reinstated upon the Effective Date, and the Des Plaines Interests shall be and continue to be in full force and effect thereafter.

 

  C. Timing and Calculation of Amounts to Be Distributed

On or before forty-five days before the anticipated Effective Date (or some other date as mutually agreed to by the Debtors and the Unsecured Creditors Committee), the Debtors will provide to the Unsecured Creditors Committee a schedule identifying (a) all Allowed Undisputed Unsecured Claims and all Allowed Insurance Covered Claims as of such date to which distributions will be made on the Initial Distribution Date in accordance with the treatments provided for Class I in Article III.B.9 of the Plan and for Class L in Article III.B.12 of the Plan, and (b) all Disputed Unsecured Claims and all Disputed Insurance Covered Unsecured Claims as of such date to which distributions will be made on the applicable Quarterly Distribution Date after such Claim becomes an Allowed Claim in accordance with the treatments provided for Class J in Article III.B.10 of the Plan and for Class L in Article III.B.12 of the Plan. The Unsecured Creditors Committee shall have seven days from receipt of such schedule to review such anticipated distributions, and the Debtors shall make themselves (or their legal and/or financial advisors) available to discuss in good faith and resolve any issues raised by the Unsecured Creditors Committee based on such review. If any issues relating to any Claims referenced in the foregoing clause (a) remain unresolved after the expiration of the seven-day review period, the Debtors shall not make any payments on account of such Claim without an order Allowing such Claim unless the Debtors and the Unsecured Creditors Committee are able to reach an agreement regarding the Allowance of such Claim reasonably acceptable to both parties. The Debtors will provide the Unsecured Creditors Committee with biweekly updates on the schedule identified herein in advance of the Effective Date.

Unless otherwise provided in the Plan, on the Initial Distribution Date or as soon as reasonably practicable thereafter (or if a Claim or Interest is not an Allowed Claim or Interest on the Initial Distribution Date, on the next Quarterly Distribution Date after such Claim or Interest becomes, as applicable, an Allowed Claim or Interest, or as soon as reasonably practicable thereafter), and except as otherwise set forth herein, each Holder of an Allowed Claim or Interest shall receive the full amount of the distributions that the Plan provides for Allowed Claims or Interests in the applicable Class from the Disbursing Agent. In the event that any payment or act under the Plan is required to be made or performed on a date that is not a Business Day, then the making of such payment or the performance of such act may be completed on the next succeeding Business Day, but shall be deemed to have been completed as of the required date. If and to the extent that there are Disputed Claims, distributions on account of any such Disputed Claims shall be made pursuant to the provisions set forth in Article VII of the Plan. Except as otherwise provided in the Plan, Holders of Claims or Interests shall not be entitled to interest, dividends, or accruals on the distributions provided for in the Plan, regardless of whether such distributions are delivered on or at any time after the Initial Distribution Date.

Marble Ridge Capital LP (“Marble Ridge”) has asserted that the Secured First Lien Note Claims are oversecured and entitled to postpetition interest in accordance with the Prepetition Creditor Agreement and the First Lien Note indentures. Therefore, Marble Ridge asserts that the Pro Rata distribution on account of the Allowed Secured First Lien Notes Claims must take into account the accrual of post-Petition Date interest calculated in accordance with the First Lien Note Indentures through the date of distribution to such claimants. The Plan embodies a settlement of whether the Holders of Prepetition Credit Agreement Claims and First Lien Notes Claims are entitled to postpetition interest and the distributions associated with such Claims are currently made on a

 

115


prepetition pro rata basis. Marble Ridge has asserted that the recoveries in the Plan do not account for the varying contractual interest rates applicable to the three separate series of First Lien Notes; it is possible certain Holders of Prepetition Credit Agreement Claims may raise similar objections. These creditors may seek to object to confirmation of the Plan. The Debtors reserve all rights with respect to this issue.

The Debtors do not concede that the Plan does not properly account for the rights of Holders of Prepetition Credit Agreement Claims and Secured First Lien Notes Claims, and reserve all rights with respect to these issues and expect to meet their burden on these issues in connection with seeking confirmation of the Plan.

The New Interests, the New Debt, the New CEC Convertible Notes, the New CEC Common Equity issued in the CEOC Merger, and any New CEC Common Equity issued in the New CEC Capital Raise (if any) shall be deemed to be issued as of the Effective Date to the Holders of Claims or Interests entitled to receive the New Interests, New Debt, the New CEC Convertible Notes, and the New CEC Common Equity pursuant to Article III of the Plan.

Notwithstanding any provision of the Plan to the contrary, all distributions to be made to Holders of Notes Claims shall be eligible to be distributed through the facilities of DTC.

 

  D. Process for Dealing with Disputed Claims

If and to the extent that there are Disputed Claims, distributions on account of any such Disputed Claims will be made pursuant to the provisions set forth in Article VII of the Plan. Except as otherwise provided in the Plan, Holders of Claims or Interests will not be entitled to interest, dividends, or accruals on the distributions provided for in the Plan, regardless of whether such distributions are delivered on or at any time after the Initial Distribution Date.

 

  E. The Separation Structure

The Debtors intend that the Separation Structure will occur through the Spin Structure. The Separation Structure will occur through the Partnership Contribution Structure, however (a) if the Company is unable to receive a favorable Spin Ruling or Spin Opinion, (b) at the election of the Requisite Consenting Bond Creditors (after consultation with the Consenting First Lien Bank Creditors), if the Estimated REIT E&P exceeds $1.6 billion, or (c) at the election of the Debtors and CEC, with the consent of the Requisite Consenting Bond Creditors, such consent not to be unreasonably withheld. In either Separation Structure, (x) the distribution of the New Debt and New Interests under the Plan will be made in a manner that will not generate taxable income to the Debtors other than cancellation of indebtedness income, and (y) the Debtors and CEC will regularly consult with the advisors for the Consenting First Lien Noteholders and advisors for the Consenting First Lien Bank Lenders on the Separation Structure and all decisions that may materially affect the tax consequences thereof on the Holders of First Lien Notes Claims and/or Prepetition Credit Agreement Claims.

On March 20, 2015, the Debtors submitted a formal request to the IRS seeking the Spin Ruling (the “Spin Request”). In response to the Spin Request, the IRS has requested additional information from the Debtors and the Debtors have provided such information to the IRS. Importantly, the Debtors believe that, because the Spin Request was filed with the IRS prior to December 7, 2015 and has not been subsequently withdrawn (and because no ruling had been issued or denied in its entirety prior to such date), the tax-free spin-off contemplated by the Plan is “grandfathered” from a provision in the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”) that prevents companies involved in tax-free spin-offs from electing REIT status. The Spin Request is currently under review by the IRS.

If the Partnership Contribution Structure is used, OpCo will have the option to participate in future issuances, or purchase additional equity from PropCo at fair market value if participation is not feasible, to maintain its percentage ownership interest in PropCo at 5 percent if it would otherwise decrease below that threshold.

 

116


To meet the requirement that a real estate investment trust have at least 100 shareholders, and notwithstanding anything herein to the contrary, the REIT will have the right to issue, for Cash, up to $125,000 of the REIT Series B Preferred Stock.

 

  F. Sources of Recovery

Distributions under the Plan will be funded with, or effectuated by, (1) Cash held on the Effective Date by or for the benefit of the Debtors, (2) Cash proceeds from the New CEC Cash Contribution and New CEC’s contribution of the Unsecured Creditors Cash Pool, (3) Cash proceeds from the New CEC OpCo Stock Purchase, (4) Cash proceeds from the New CEC PropCo Common Stock Purchase, (5) the issuance of New CEC Convertible Notes, (6) the issuance of New CEC Common Equity, (7) Cash proceeds from the sale of New CEC Common Equity pursuant to the New CEC Capital Raise (if any), (8) Cash proceeds from and the issuance of the New Debt, (9) the issuance of the PropCo Preferred Equity and Cash proceeds from the PropCo Preferred Equity Put Right, (10) the issuance of the New Interests, (11) the Bank Guaranty Settlement, (12) the waiver by CAC of its recoveries on account of its Senior Unsecured Notes Claims, (13) the waiver by the Holders of First Lien Notes Claims of any recoveries at the Debtors’ direction, or the assignment of any such recoveries at the Debtors’ direction, on account of any First Lien Notes Deficiency Claims, (14) the waiver by the Holders of Prepetition Credit Agreement Claims and First Lien Notes Claims, and their respective trustees and/or agents, at the Debtors’ direction, of the turnover rights under the Second Lien Intercreditor Agreement, and (15) the waiver by the Holders of Prepetition Credit Agreement Claims and First Lien Notes Claims and their respective trustees and/or agents of the turnover rights under the Subsidiary-Guaranteed Intercreditor Agreement.

The tables below show the sources and uses for distributions of funds under the Plan, assuming (a) an Effective Date of 12/31/16 and (b) $1.8 billion of CPLV Market Debt is raised.

Sources of Funds

 

Source

   Amount     

Notes

New CEC Cash Contribution

   $ 318m       Net of $88m forbearance fees paid prior to Effective Date

Bank Guaranty Settlement

   $ 523m       Net of $61m Upfront Payment paid prior to Effective Date; to be reduced by portion of Excess Cash Sweep granted to Holders of Prepetition Credit Agreement Claims

New CEC OpCo Stock Purchase

   $ 700m      

CEC Cash Consideration to General Unsecured Claims

   $ 6m      
  

 

 

    

Subtotal New CEC Cash Sources

   $ 1,548m      
  

 

 

    

OpCo First Lien Debt

   $ 1,188m       Issued for Cash Proceeds

OpCo Second Lien Debt

   $ 547m       Issued for Cash Proceeds

CPLV Market Debt

   $ 1,800m       Issued for Cash Proceeds

Proceeds of PropCo Preferred Equity Distribution

   $ 250m       Assumed to be fully funded

PropCo Preferred Equity Upsize Amount

   $ 117m       Assumed to be fully funded

CEOC Cash

   $ 875m      
  

 

 

    

Total Cash Sources

   $ 6,324m      
  

 

 

    

 

117


Uses of Funds

 

Source

   Amount     

Notes

Cash to Holders of Prepetition Credit Agreement Claims

   $ 705m       Can be reduced by up to $300m paid by Debtors prior to the Effective Date

Cash to Holders of Secured First Lien Notes Claims

   $ 207m      

Additional Cash to Holders of Secured First Lien Notes Claims

   $ 700m      

Additional Cash to Holders of Prepetition Credit Agreement Claims

   $ 882m       Cash proceeds of OpCo First Lien Debt Syndication

Additional Cash to Holders of Secured First Lien Notes Claims

   $ 306m       Cash proceeds of OpCo First Lien Debt Syndication

Additional Cash to Holders of Prepetition Credit Agreement Claims

   $ 406m       Cash proceeds of OpCo Second Lien Debt Syndication

Additional Cash to Holders of Secured First Lien Notes Claims

   $ 141m       Cash proceeds of OpCo Second Lien Debt Syndication

Additional Cash to Holders of Prepetition Credit Agreement Claims

   $ 1,117m       Cash proceeds of CPLV Market Debt Syndication

Additional Cash to Holders of Secured First Lien Notes Claims

   $ 683m       Cash proceeds of CPLV Market Debt Syndication

Cash for Repayment of CPLV Mezzanine Debt held by Holders of Secured First Lien Notes Claims

   $ 367m       Cash proceeds of PropCo Preferred Equity Distribution and PropCo Preferred Equity Upsize Amount
  

 

 

    

Subtotal Plan Distributions

   $ 5,514m      
  

 

 

    

Remaining Forbearance Fees to Holders of Secured First Lien Notes Claims

   $ 88m       Net of $88m paid prior to Effective Date

Estimated Transaction and Backstop Fees

   $ 105m       Includes OpCo debt syndication fees, CPLV Market Debt syndication fees, PropCo Preferred Equity Backstop fees, incremental legal fees for syndicated debt

CEC Cash Consideration to General Unsecured Claims

   $ 6m      

Convenience Cash Pool

   $ 13m      

Capitalization of PropCo at Inception

   $ 50m      

Cash Recovery to Admin, Secured, Priority and Non-Obligor Claims

   $ 25m      
Bank Guaranty Settlement    $ 523m       Net of $61m Upfront Payment paid prior to Effective Date; to be reduced by portion of Excess Cash Sweep granted to Holders of Prepetition Credit Agreement Claims
  

 

 

    

Total Cash Uses

   $ 6,324m      
  

 

 

    

 

118


  1. Cash Held on the Effective Date by the Debtors

The Debtors currently project that as of a hypothetical Effective Date on December 31, 2016, they will hold in excess of the $875 million of cash required to fund distributions under the Plan. This estimate is based on the Debtors’ existing 2016 budget and certain pro forma adjustments to reflect certain impacts to be caused by consummation of the Plan.

 

  2. CEC-CAC Merger Agreement.

The Plan is conditioned on the merger of CEC and CAC, which will occur on or before the Effective Date. It is also a condition of the Plan that the terms of the merger result in New CEC making available 53.1% of New CEC Common Equity to the Debtors’ creditors under the Plan.

 

  (a) New CEC Cash Contribution.

On the Effective Date, New CEC shall pay to the Debtors the New CEC Cash Contribution, the amount of which will be the excess of (a) $406,000,000 in Cash, plus (b) Cash for any dilution of Available Cash otherwise payable to the Holders of First Lien Notes Claims as adequate protection payments under the Cash Collateral Order on account of the payment of the RSA Forbearance Fee under the Bank RSA, plus (c) Cash to fund the Unsecured Creditor Cash Pool and the Unsecured Insurance Creditor Cash Pool, over (d) any portion of the RSA Forbearance Fee under the Bond RSA and the Bank RSA paid by CEC and/or New CEC. The New CEC Cash Contribution will be used by the Debtors and the Reorganized Debtors, as applicable, to fund general corporate purposes, the Restructuring Transactions, and the distributions under the Plan. In addition, New CEC shall contribute its Cash portion of the Unsecured Creditor Cash Pool and any Cash, if any, to be paid pursuant to the Additional CEC Bank Consideration and/or the Additional CEC Bond Consideration to the Debtors to provide the distributions contemplated by the Plan.

 

  (b) New CEC OpCo Stock Purchase.

On the Effective Date, New CEC shall consummate the New CEC OpCo Stock Purchase for $700 million, at which time New CEC shall own 100% of the OpCo Common Stock.

 

  (c) New CEC PropCo Common Stock Purchase.

If the Partnership Contribution Structure is used, on the Effective Date, New CEC shall consummate the New CEC PropCo Common Stock Purchase for $91 million, at which time New CEC shall own 5% of the PropCo Common LP Interests on a fully diluted basis (including dilution in connection with the PropCo Equity Elections but excluding dilution from PropCo Preferred Equity, if any). If the Partnership Contribution Structure is used, the Holders of Secured First Lien Notes Claims shall be required on a pro rata basis to put 5% of the PropCo Common Equity to New CEC in connection with the New CEC PropCo Common Stock Purchase. For the avoidance of doubt, if the Spin Structure is used, New CEC shall not be required to make the New CEC PropCo Common Stock Purchase.

 

119


In all cases, the New CEC PropCo Common Stock Purchase shall be effectuated by a contribution of cash from CEC or New CEC to CEOC, with such cash distributed to Holders of Claims in exchange for CEOC’s retention of the PropCo Common LP Interests. If the PropCo Equity Election described below would materially affect the amount and/or value of PropCo Common Equity New CEC must purchase for the Partnership Contribution Structure, the Debtors will negotiate with CEC and the representatives of the Consenting Bond Creditors regarding appropriate adjustments to the amount of Cash necessary to purchase 5% of PropCo Common Equity pursuant to the New CEC PropCo Common Stock Purchase. The Debtors and Holders of Claims are continuing to evaluate whether CEOC, CEOC’s successor in interest following the CEOC Merger, or New CEC will hold such PropCo Common LP Interests. For the avoidance of doubt, if the Spin Structure is used, New CEC shall not be required to, and shall not, make the New CEC PropCo Common Stock Purchase.

 

  (d) New CEC Convertible Notes.

On the Effective Date, New CEC shall execute and deliver the New CEC Convertible Notes Documents to the New CEC Convertible Notes Trustee, New CEC shall deliver $1 billion of New CEC Convertible Notes to the Debtors, and the Debtors shall distribute the New CEC Convertible Notes pursuant to the terms of the Plan to the Holders of Non-First Lien Claims.

Subject to the occurrence of the Effective Date, the New CEC Convertible Notes Documents shall constitute legal, valid, and binding obligations of New CEC and shall be enforceable in accordance with their respective terms.

 

  (e) New CEC Common Equity.

On the Effective Date, OpCo shall issue OpCo Series A Preferred Stock. As described more fully in the Restructuring Transactions Memorandum, OpCo will merge into a newly formed subsidiary of New CEC (or its predecessors) pursuant to the CEOC Merger. In exchange for the CEOC Merger, on the Effective Date, New CEC shall issue New CEC Common Equity in accordance with the Plan distributions in Article III of the Plan in exchange for the OpCo Series A Preferred Stock to the Holders of Prepetition Credit Agreement Claims, Secured First Lien Notes Claims, and Non-First Lien Claims pursuant to the terms of the Plan. The percentages of New CEC Common Equity issued pursuant to the Plan will take into account any dilution that would otherwise occur based on the potential conversion of New CEC Convertible Notes to New CEC Common Equity.

All holders of, or persons that will hold, New CEC Common Equity shall have preemptive rights to participate (pro rata based on such holder’s actual or anticipated, and subsequently implemented, pro forma New CEC Common Equity), in any New CEC Capital Raise, which participation shall be on the same terms as the other participants and shall include reasonable disclosure, notice, and opportunity to exercise such rights. The Debtors, CEC, and the Unsecured Creditors Committee shall collectively use reasonable good faith efforts to facilitate the transferability of the preemptive participation rights (if practicable). To the extent the Debtors determine that the structure of a New CEC Capital Raise would have negative consequences with respect to the tax treatment of the Spin Structure, the Debtors shall be able to modify or eliminate to the extent necessary the New CEC Capital Raise to avoid such negative consequences.

 

  (f) RSA Forbearance Fees

On the Effective Date, New CEC shall pay the RSA Forbearance Fees pursuant to the Bond RSA so long as the Bond RSA is in effect and New CEC shall pay the RSA Forbearance Fees pursuant to the Bank RSA so long as the Bank RSA and the Bond RSA are in effect.

 

  (g) New CEC Capital Raise

The New CEC Capital Raise is any transaction by New CEC involving the raising of Cash in connection with the sale of New CEC Common Equity before or concurrent with the Effective Date. Any New CEC Capital Raise transaction may only raise Cash up to an amount sufficient to fund New CEC’s sources and uses under the Plan plus $100 million. All holders of, or persons that will hold, New CEC Common Equity will have preemptive

 

120


rights to participate in any such New CEC Capital Raise, and such right shall be proportionate to the pro forma amount of New CEC Common Equity such persons will hold upon consummation of the Plan and the CEC-CAC merger. If any Holder of New CEC Common Equity fails to participate in the New CEC Capital Raise, that Holders’ equity ownership of New CEC Common Equity will be diluted. Based on the New CEC Projections prepared by CEC and CAC and attached hereto as Exhibit J, any New CEC Capital Raise is currently expected to raise approximately $740 million. The final amount of any New CEC Capital Raise, if any, could be materially higher or lower than these projected amounts.

 

  3. PropCo Equity Election.

The respective aggregate principal amounts of the CPLV Mezzanine Debt (if any), the PropCo First Lien Notes, the PropCo First Lien Term Loan, and the PropCo Second Lien Notes each may be (but are not required to be) reduced by the PropCo Equity Election. The PropCo Equity Election may not reduce the aggregate principal amount of CPLV Mezzanine Debt (if any), PropCo First Lien Notes, PropCo First Lien Term Loan, and PropCo Second Lien Notes by no more than $1,250 million. To the extent that Holders of Allowed Prepetition Credit Agreement Claims and/or Holders of Secured First Lien Notes Claims exercise, in their sole discretion, the PropCo Equity Election such that the aggregate principal amount of the CPLV Mezzanine Debt (if any), PropCo First Lien Notes, PropCo First Lien Term Loan, and PropCo Second Lien Notes issued pursuant to the Plan would be reduced by more than $1,250 million, the PropCo Equity Election shall reduce first the CPLV Mezzanine Debt (if any), second the PropCo Second Lien Notes, and third, on a Pro Rata basis, the PropCo First Lien Notes and the PropCo First Lien Term Loan, until the aggregate principal amount of such debt shall be reduced by no more than $1,250 million. A Holder making a PropCo Equity Election will receive $1 in value of PropCo Common Equity (at an assumed valuation of $1,620 million for 100 percent of PropCo Common Equity on a fully diluted basis) for every $1 in aggregate principal amount of PropCo First Lien Notes, PropCo First Lien Term Loan, PropCo Second Lien Notes, and CPLV Mezzanine Debt (if any) that such Holder would otherwise receive under the Plan. The PropCo Equity Election Procedures shall be included in the Plan Supplement and the exercise of the PropCo Equity Election shall occur after the entry of the Confirmation Order but before the Effective Date.

The results of the PropCo Equity Election are subject to the Debtors’ sole determination that the PropCo Equity Election will not have negative consequences with respect to the tax treatment of the Spin Structure. In the event the Debtors determine, in good faith and in their sole discretion, that the results of the PropCo Equity Election would have negative consequences with respect to the tax treatment of the Spin Structure, the elections with respect to the PropCo Equity Election shall be modified or eliminated to the extent necessary to avoid such negative consequences.

 

  4. New Debt

The Plan will eliminate approximately $10 billion in funded debt from the Debtors’ balance sheet. If the Plan is confirmed and consummated, the Debtors project that OpCo, PropCo, and the CPLV Entities will have the following funded debt obligations as of the Effective Date. As described below, certain of this funded debt will be issued to third parties for Cash to fund Cash distributions under the Plan. The other funded debt will be issued to certain Holders of Allowed Claims in accordance with the Plan.

 

  (a) OpCo Funded Debt Obligations

On the Effective Date, OpCo will have funded debt obligations of at least $1,735 million, comprised of the following.

 

    OpCo First Lien Debt. OpCo First Lien Debt that OpCo will issue to third parties for Cash in the amount equal to $1,188 million on the Effective Date. If the OpCo First Lien Debt is not fully issued to third parties and the Requisite Consenting Bank Creditors waive the Plan’s requirement that OpCo First Lien Debt be issued to third parties, then OpCo may issue up to $882 million in principal amount of OpCo First Lien Term Loans on a pro rata basis to each Holder of an Allowed Prepetition Credit Agreement Claim. Similarly, if the OpCo First Lien Debt is not fully issued to third parties and the Requisite Consenting Bond Creditors waive the Plan’s requirement that OpCo First Lien Debt be issued to third parties, then OpCo may issue up to $306 million in principal amount of OpCo First Lien Notes on a pro rata basis to each Holder of an Allowed Secured First Lien Notes Claim.

 

121


    OpCo Second Lien Debt. OpCo Second Lien Debt that OpCo will issue to third parties for Cash in an amount equal to $547 million on the Effective Date. If the OpCo Second Lien Debt is not fully issued to third parties and the Requisite Consenting Bank Creditors waive the Plan’s requirement that OpCo Second Lien Debt be issued to third parties, then OpCo may issue up to $406 million in principal amount of OpCo Second Lien Term Loan on a pro rata basis to each Holder of a Prepetition Credit Agreement Claim. Similarly, if the OpCo Second Lien Debt is not fully issued to third parties and the Requisite Consenting Bond Creditors waive the Plan’s requirement that OpCo Second Lien Debt be issued to third parties, then OpCo may issue up to $141 million in principal amount of OpCo Second Lien Notes on a pro rata basis to each Holder of an Allowed Secured First Lien Notes Claim.

Of the $1,188 million in Cash proceeds from the OpCo First Lien Debt, the Debtors will distribute $882 million on a pro rata basis to Holders of Allowed Prepetition Credit Agreement Claims and $306 million on a pro rata basis to Holders of Allowed Secured First Lien Notes Claims. Of the $547 million in Cash proceeds from the OpCo Second Lien Debt, the Debtors will distribute $406 million to Holders of Allowed Prepetition Credit Agreement Claims and $141 million to Holders of Allowed Secured First Lien Notes Claims.

The OpCo First Lien Debt and the OpCo Second Lien Debt will be guaranteed by CEC pursuant to the OpCo Guaranty Agreement, if necessary to ensure syndication thereof to third parties. If not all of the OpCo First Lien Debt or OpCo Second Lien Debt is syndicated and the OpCo First Lien Term Loan, OpCo First Lien Notes, and/or OpCo Second Lien Notes are issued to the Holders of Prepetition Credit Agreement Claims and/or Secured First Lien Notes Claims, CEC shall guarantee such debt pursuant to the OpCo Guarantee Agreement.

 

  (b) PropCo Funded Debt Obligations

On the Effective Date, and subject to reduction (if any) on account of the PropCo Equity Election, PropCo will have funded debt obligations ranging between approximately $3,567 million and $4,150 million, comprised of the following.

 

    PropCo First Lien Term Loans. $1,961 million in principal amount of PropCo First Lien Term Loans to be issued on a pro rata basis to each Holder of an Allowed Prepetition Credit Agreement Claim.

 

    PropCo First Lien Notes. $431 million in principal amount of PropCo First Lien Notes to be issued on a pro rata basis to each Holder of an Allowed Secured First Lien Notes Claim.

 

    PropCo Second Lien Notes. $1,425 million in principal amount of PropCo Second Lien Notes to be issued on a pro rata basis to each Holder of an Allowed Secured First Lien Notes Claim.

 

    Reduced. The principal amount of PropCo Second Lien Notes to be issued will be reduced by $250 million on account of the issuance of the PropCo Preferred Equity (excluding the PropCo Preferred Equity Upsize Amount); provided that in the event that the Debtors are to issue CPLV Mezzanine Debt, the $250 million on account of the issuance of the PropCo Preferred Equity (other than in respect of the PropCo Preferred Equity Upsize Amount) will first be used to reduce any such CPLV Mezzanine Debt to be issued to Holders of Allowed Secured First Lien Notes Claims.

 

    Increased. The principal amount of PropCo Second Lien Notes to be issued may be increased by up to $333 million on account of the PropCo Second Lien Upsize Amount if, as described below, the CPLV Market Debt is not fully issued to third parties and Holders of Allowed Prepetition Credit Agreement Claims do not vote as a class to make the CPLV Mezzanine Election. Any PropCo Second Lien Notes issued on account of the PropCo Second Lien Upsize Amount will be issued on a pro rata basis to each Holder of an Allowed Prepetition Credit Agreement Claim.

 

122


Thus, the Debtors project that between $1,175 million and $1,758 million in principal amount of PropCo Second Lien Notes will be issued.

None of the PropCo First Lien Term Loan, the PropCo First Lien Notes, nor the PropCo Second Lien Notes will be guaranteed by CEC. Additionally, the CPLV Entities will not be obligated on such debt, nor will any of the CPLV Entities’ assets be pledged in support of such debt.

 

  (c) CPLV Funded Debt Obligations

On the Effective Date, and subject to the PropCo Equity Election, the CPLV Entities will have funded debt obligations ranging between approximately $1,900 million and $2,600 million, comprised of the following.

 

    CPLV Market Debt. At least $1,800 million and no more than $2,600 million in principal amount of CPLV Market Debt that CPLV Sub will issue to third parties for Cash on the Effective Date.

 

    CPLV Mezzanine Debt. If the Debtors, after using commercially reasonable efforts, are able to issue at least $1,800 million in principal amount of CPLV Market Debt to third parties for Cash, but are unable to issue the full $2,600 million in principal amount, then CPLV Mezz will issue CPLV Mezzanine Debt in an initial aggregate amount equal to the difference between $2,600 million and the original aggregate principal amount of CPLV Market Debt.

 

    Reduced. The principal amount of the CPLV Mezzanine Debt to be issued (if any) to Holders of Allowed Secured First Lien Notes Claims will be reduced by $250 million on account of the issuance of the PropCo Preferred Equity (excluding the PropCo Preferred Equity Upsize Amount). As noted above, the PropCo Second Lien Notes that will be issued to Holders of Allowed Secured First Lien Notes Claims will be reduced by any remainder of the $250 million on account of the issuance of the PropCo Preferred Equity (excluding the PropCo Preferred Equity Upsize Amount).

 

    Reduced. In the event that at least $1,800 million but less than $2,000 million of CPLV Market Debt is issued, then in lieu of the increased CPLV Mezzanine Debt that would be issued to the Holders of Secured First Lien Notes Claims on account of the difference between $2,000 million and the original aggregate principal amount of CPLV Market Debt, the Holders of Allowed Secured First Lien Notes Claims will receive the PropCo Preferred Equity Upsize Shares (subject to the PropCo Preferred Equity Call Right and the PropCo Preferred Equity Put Right).

 

    Reduced. In the event that Holders of Allowed Prepetition Credit Agreement Claims do not vote as a class to make the CPLV Mezzanine Election, then up to $333 million of CPLV Mezzanine Debt that would otherwise be issued to Holders of Allowed Prepetition Credit Agreement Claims will instead be issued as PropCo Second Lien Notes in the same principal amount.

If the Debtors are able to issue the full $2,600 million in principal amount of CPLV Market Debt to third parties for Cash on the Effective Date, then the Debtors will distribute $1,450 million of such Cash proceeds on a pro rata basis to Holders of Allowed Prepetition Credit Agreement Claims and $1,150 million of such Cash proceeds on a pro rata basis to Holders of Allowed Secured First Lien Notes Claims. In the event the Debtors, after using commercially reasonable efforts, are unable to issue the full $2,600 million in principal amount of CPLV Market Debt to third parties for Cash on the Effective Date, the Debtors will distribute CPLV Mezzanine Debt in the amount required to make up for the shortfall to the Holders of the Prepetition Credit Agreement Claims and the Holders of the Secured First Lien Notes Claims pursuant to the following terms.79

 

79  If the Holders of Prepetition Credit Agreement Claims do not vote as a Class to exercise the CPLV Mezzanine Election, then any CPLV Mezzanine Debt to be distributed to Holders of Allowed Prepetition Credit Agreement Claims will instead by distributed as PropCo Second Lien Notes in the same principal amount that such Holders would have received in CPLV Mezzanine Debt; provided that such PropCo Second Lien Upsize Amount cannot exceed $333 million in principal amount.

 

123


    The first $300 million of CPLV Mezzanine Debt (before giving effect to any CPLV Mezzanine Equitized Debt) will be issued one-third to the Holders of Allowed Prepetition Credit Agreement Claims and two-thirds to the Holders of Allowed Secured First Lien Notes Claims, each to be shared Pro Rata among such Holders thereof.

 

    Any amounts of CPLV Mezzanine Debt over $300 million and less than $600 million (before giving effect to any CPLV Mezzanine Equitized Debt) will be issued equally to the Holders of Allowed Prepetition Credit Agreement Claims and Allowed Secured First Lien Notes Claims to be shared Pro Rata among such Holders thereof.

 

    Any amounts of CPLV Mezzanine Debt over $600 million and less than $800 million (before giving effect to any CPLV Mezzanine Equitized Debt) will be issued 41.7 percent to the Holders of Allowed Prepetition Credit Claims and 58.3 percent to the Holders of Allowed Secured First Lien Notes Claims to be shared Pro Rata among such Holders thereof.

An illustration of these mechanics is outlined in the tables below.

Distributions of Certain Cash and Securities to Holders of Prepetition Credit Agreement Claims

 

Security

   $1.8b Raise      $2.0b Raise      $2.3b Raise      $2.6b Raise  

CPLV Market Debt Proceeds80

   $ 1,117m       $ 1,200m       $ 1,350m       $ 1,450m   

Initial Allocation of CPLV Mezzanine Debt81

   $ 333m       $ 250m       $ 100m       $ 0m   

Less: PropCo Second Lien Upsize Amount82

   ($ 333m    ($ 250m    ($ 100m    $ 0m   

Total CPLV Mezzanine Debt

   $ 0m       $ 0m       $ 0m       $ 0m   

Plus: PropCo Second Lien Upsize Amount

   $ 333m       $ 250m       $ 100m       $ 0m   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total