Lobbyists for Caesars Entertainment are jockeying to include a measure in the must-pass government spending bill that would help the Las Vegas-based casino giant avoid bankruptcy as it goes through a debt restructuring.
The measure, which has the support of Democratic Senate leader and Nevada Sen. Harry Reid, would weaken a federal law meant to protect small bondholders —- including pension funds — against abuses by large investors.
If passed, it would help Caesars by giving the company more leeway to change the terms of its debt repayment — over the objections of some bondholders, and without oversight from a bankruptcy judge.
Opposing the measure are a group of pension funds, as well as hedge funds and individual bondholders that collectively hold about $5.4 billion in debt.
Their K Street allies say Caesars is trying to quietly slip language into the omnibus spending bill — which must pass by Friday to avoid a government shutdown, though a short-term spending bill could be approved. The language would invalidate recent court rulings regarding Caesars’ debt restructuring that Caesars disagrees with.
A similar amendment, backed by Sen. Richard Shelby (R-Ala.), had been attached to the highway bill but was stripped out at the last minute by Democrats upset that it would have benefited the for-profit Education Management Corp., (EDMC), which was undergoing debt restructuring as well. The omnibus language has since been revised to exclude any benefits that would have retroactively applied to EDMC.
Critics of the omnibus maneuver include a group of 18 legal scholars who sent a letter Tuesday to congressional leaders including Reid, citing their concern about the language becoming law without a proper public airing.
“Several of us believe that the [law] should be amended, but not in the way proposed,”
the letter says. “Any amendment of the [law] should take place only after legislative hearings and opportunity for public comment … There have been no hearings on the matter, no opportunity to hear from a diverse group of experts or the public, and no attempt to establish a legislative record.”
A Caesars spokesperson declined to comment. Caesars has tapped lobbyists at Brownstein Hyatt Farber Schreck, who are working with bankruptcy law expert and UCLA professor Ken Klee, to advance its position.
“This amendment preserves 76 years of [law] by clarifying that majority bond holders can exercise their contractual rights to change bond covenants or release guarantees without filing for bankruptcy,” Klee said. “Facilitating out of court exercise of collective action clauses in bond indentures saves jobs and costs by avoiding bankruptcies.”
Reid indicated his support for the amendment during a press conference Tuesday, saying the provision would preserve a law “to allow someone that is having financial difficulties [to] have a pre-bankruptcy discussion with the bondholders, the debtors, and in the process, try to work something out.”
A spokeswoman for Reid declined to comment beyond his Tuesday remarks or elaborate on how the rider got attached to the omnibus.
A former chairman of the Nevada Gaming Commission, Reid is a longtime champion of the casino industry. Most of his chits have been spent lately on legalizing online poker although he opposes legalization of online gaming more generally (and could ultimately back a ban on it).
Advocates for Caesars say they are trying to restore the original intent of the law after two recent court decisions have applied the statute too liberally. They want to enable Caesars and other cash-strapped entities to negotiate with bondholders before potentially declaring bankruptcy and enduring its consequences, such as cutting jobs and closing facilities.
Under the current law, the Trust Indenture Act (TIA), companies cannot “impair” bondholders’ right to collect payment without their consent. The Caesars’ language would narrow the definition of “impair” by prohibiting it only in instances where the bond agreement is explicitly changed to reduce the principal payment or interest rate.
The legislative maneuvering follows months of contentious legal battles between Caesars and many of its bondholders over the debt restructuring process.
The company’s largest subsidiary, Caesars Entertainment Operating Co, declared Chapter 11 bankruptcy in January. The parent company, Caesars Entertainment, is not bankrupt. Various bondholders have sued Caesars, accusing the parent company of trying to avoid liability for the debt incurred by its subsidiary. Caesars has maintained the legality of its transactions, including the termination of a guarantee by the parent company to repay debt incurred by its subsidiary.
Two recent court rulings favor the bondholders.
In two separate cases — one brought by creditors against EDMC, the other brought by creditors against Caesars — judges in the Southern District of New York ruled that the distressed companies cannot force non-consenting bondholders to accept a lesser payment than they bargained for, if the negotiations are being done out-of-court. EDMC has appealed and Caesars has sought permission to appeal.