By Tom Hals and Tracy Rucinski
(Reuters) - Investors in Caesars Entertainment Corp (O:CZR) were scrambling on Wednesday to grasp the cost from a court-ordered investigation that said the casino company could face $5 billion in potential damages from the bankruptcy of its operating unit.
An examiner's report on Tuesday found Caesars and its private equity backers could be on the hook for their efforts to keep the struggling casino empire afloat, which ended with last year's bankruptcy of Caesars' operating unit, CEOC.
Examiner Richard Davis and an army of lawyers investigated claims by creditors that the operating unit was plundered for the benefit of the parent company and Apollo Global Management and TPG Capital, which control Caesars.
"The report's scope was much broader than expected and it was much more creditor-friendly than expected," said Alex Bumazhny, who follows Caesars for Fitch Ratings, a credit rating agency.
While the report is nonbinding, junior creditors led by the Appaloosa Management hedge fund will seize upon its findings to demand a better payout in ongoing mediated talks.
CEOC's lawyers have said they anticipate Caesars will raise its proposed contribution of $1.5 billion in order to settle claims that it stripped the best assets, such as the Linq Hotel & Casino in Las Vegas.
The junior creditors have timing on their side. They have filed multiple lawsuits against Caesars and one case could go to trial in a Manhattan federal court as soon as May 9. Caesars has said it expects to prevail in that case, but has also warned that losing would plunge it into bankruptcy alongside its operating unit.
In July, the operating unit will lose the exclusive right to propose a plan of reorganization.
"The report clearly provides a level of leverage that bondholders didn't have before," said James Newell, a bankruptcy attorney with Buchanan Ingersoll & Rooney.
Shares of Caesars fell as much as 18 percent in early trading on Nasdaq and closed down 13.4 percent at $6.23.
Davis's report found Apollo and TPG could be liable for their role in deals that led to the operating unit's bankruptcy, although shares of Apollo closed up 0.5 percent at $16.94 on the New York Stock Exchange.
Both TPG and Apollo said in statements they disagreed with the findings and that they acted in good faith to help Caesars Entertainment Operating Co Inc cut its debt. Both said the deals involving the operating unit were reviewed by independent experts and outside law firms.
At a hearing on Wednesday, U.S. Bankruptcy Judge Benjamin Goldgar, who ordered the investigation, praised Davis's report, which runs more than 1,000 pages.
"It's not as if you haven't given people lots to chew on. This is not a swiss cheese," Goldgar said.