Investors Await Default Insurance Ruling in Caesars Bankruptcy

As creditors fight over the scraps of the bankrupt operating unit of Caesars Entertainment Corp., a three- person panel will soon decide whether investors who bought default insurance should get paid from contracts that expired nearly a month before the company’s Chapter 11 filing.

The casino operator’s decision to suspend payments on a portion of its debt obligations due on Dec. 15, a month before the Jan. 15 bankruptcy filing of Caesars Entertainment Operating Corp., has called into question the fate of credit-default swaps that were set to expire during the interim period. The external review panel will adjudicate whether payouts were triggered in December, which would ensure payment for holders of swaps expiring on Dec. 20 along with the rest of the contracts.

The independent review panel has been called on to deliver a ruling for only the second time in the history of the credit- swaps marketplace after a committee of bond traders that normally determines such cases failed to deliver a conclusive ruling. The decision brings to a head a saga that has seen Caesars accuse some of its bondholders of obstructing debt- restructuring talks by purchasing swaps to profit from an accelerated bankruptcy filing.

“The bankruptcy triggered all the CDS that expired post- December without any controversy,” Chris Snow, an analyst at CreditSights Inc., said in a telephone interview. “Now everyone’s just waiting to see what happens on those December swaps.”

Binding Decision

Elliott Management Corp. and Pacific Investment Management Co. were among five members of a 15-firm International Swaps & Derivatives Association committee that voted for the payouts to be triggered. That left the committee two votes short of the 12- vote supermajority needed to dismiss the claim. Caesars had identified Elliott as one of the firms thwarting restructuring efforts to inflate the value of its swaps positions. Elliott added to the derivatives trades as it helped orchestrate a bankruptcy plan, two people with knowledge of the trading said in December.

ISDA, a trade organization that sets standards for the credit-swaps marketplace, said on its website that the panel of three third-party professionals will determine the status of the swaps in a ruling next week. The panel’s decision will be binding for all market participants. The ISDA committee already ruled unanimously on Jan. 16 that Caesars’s decision to file for protection in January triggered payment on the remainder of the swaps

Credit Event

Credit-default swaps are insurance-like contracts that protect banks, hedge funds and other investors against losses on a company’s debt, or allow them to speculate on its creditworthiness. If ISDA determines that a credit event has taken place, buyers of the swaps are paid the face amount of the contract, minus the value of the underlying debt.

The Caesars ruling focuses on the Las Vegas-based company’s election to skip $225 million of interest payments due Dec. 15 on some of its junior bonds. While a company usually has a 30- day grace period to cure a missed interest payment, the request made by swaps buyers to ISDA claimed that both principal and interest needed to be paid for a principal payment to have been considered complete, according to their reading of the bond agreement. The ISDA request further claimed that a failure to pay principal due on the debt has no grace or cure period.

Biggest Stake

The outstanding swaps tied to Caesars would result in a maximum payout of $1.3 billion to buyers of derivatives protecting against a default by the company after overlapping trades are accounted for, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. The $26.4 billion gross amount of Caesars swaps is the most for any non-financial U.S. corporate borrower.

Milbank, Tweed, Hadley & McCloy LLP has already filed a brief on behalf of those voting against the credit event, a group that includes swaps dealers such as JPMorgan Chase & Co. and Bank of America Corp, while Stroock & Stroock & Lavan LLP filed a brief on behalf of those in favor of declaring a credit event.

Once ISDA’s determinations committee finalizes a list of all swaps that were triggered, it will conduct an auction to determine the value of the payouts.

“Those holding the Dec. 20 swaps are the ones with the biggest economic stake in this decision,” Julia Lu, a lawyer with Richards Kibbe & Orbe, said in a telephone interview. The firm filed a brief on behalf of a client advocating that Caesars didn’t trigger a credit event in December.