15/06/22, Caesars Entertainment Bankruptcy
Rome wasn't built in a day, but Caesars was destroyed in a decade.
Hello everybody, thank you for reading yet another of my pieces. Still surprised you’re here, to be honest.
I interviewed a great guest today, and hopefully, that comes out on Friday. Hopefully.
With that being said, let’s dive in!
Outline
Caesars Entertainment, as most of you know, is a huge casino/hotel company. With 54,000 employees and revenue in the billions, these guys are a big deal. However, I will not be analysing their business, but rather focusing on the disputes caused by their bankruptcy.
I will show you how investors in a company (those who own stakes in Caesars) can sometimes clash with creditors (those who are owed money by Caesars). We have Apollo and TPG as the two private equity investors, accused of fraud and other misdeeds by the creditors, valiantly led by Oaktree and Appaloosa.
To show you just how messy this deal gets, I bring you none other than Caesars’ own financial advisor, James Millstein, who stated the bankruptcy was:
‘one of the greatest messes of our time’
Talk about being dramatic…
Timeline
1990s-2008: Caesars goes from a small operation to more than 50 properties. Why? Largely due to a guy called Gary Loveman, a former Harvard Business School professor, who introduced analytics and loyalty programs to casinos before it was widespread.
2008: Apollo and TPG (two of the largest buyout funds) acquire Caesars Entertainment through a $31b LBO (at this point Caesars was known as Harrah’s Entertainment).
2008-2014: Just like the Hilton deal we covered, Caesars runs into huge trouble as the financial crisis reduces consumer discretionary spending (hotels, drinks, and other things associated with Vegas that I probably can’t write here). Caesars execs, egged on by Apollo and TPG, start selling the best assets into a new company - owned by Apollo and TPG (what a coincidence). Oaktree, Appaloosa and other creditors are left holding the proverbial excreta as their debt is now owed by a company that had effectively been massively reduced in value to benefit the PE funds.
2014: Did you expect these creditors to take this sitting down? No, lawsuits started almost immediately. These creditors are claiming fraud - a particularly strong claim for investors of this size and calibre.
2015: Caesars files for bankruptcy, loaded with $24b of debt. This protects them from some creditor claims whilst they restructure.
2016: Richard Davis (the independent examiner in charge of the restructuring process) concludes that Apollo and TPG had unfairly benefited from these asset sales. Uh oh. Simultaneously, Judge Goldgar (in charge of the creditor lawsuits) orders those at the top of Apollo and TPG to disclose their personal financial statements.
2017: This double whammy was too much, and the new Caesars entity that had bought all the good assets return $6b to the stripped Caesars entity, effectively giving control to the creditors.
Present day: Well, those creditors must be pretty chuffed with themselves for fighting so hard, because Caesars is doing well nowadays (see graph below). I guess it helps that an ex-casino tycoon was president for a bit…
Analysis
Clearly the bondholders won in this deal. But why did it even get to the stage where the PE players were trying to asset strip and undermine the bondholders in the first place?
Well, creditors had been complaining for a long time that PE funds have often exercised far too much power and, effectively, screwed creditors over in order to protect the equity. Apollo was, and still is, notorious for this hard-nosed style of negotiation.
In fact, an excellent book called ‘The Caesars Palace Coup’ summarises the dispute perfectly:
‘the teams from Oaktree and Appaloosa believed there were higher stakes at play. Private equity firms, they believed—best exemplified by Apollo—had become far too abusive of creditors, wielding legal documents and hardball negotiating tactics as swords to take value from loan and bondholders that simply did not belong to them. To Oaktree and Appaloosa, nothing less than the sanctity of the US capital markets was at stake in this room. ‘
So on one level, we’re looking at a casino chain restructuring, but at a deeper level, we’re looking at a clash of financial interests between two classes of stakeholders: equity investors and creditors.
Look how philosophical us deal-nerds can get.
Here, we see the value of these bonds decrease and increase over time as Caesars gets stripped by PE funds (2014), falls into bankruptcy (2015), creditors start winning lawsuits (2016), and finally when the creditors emerge victorious in their dispute.
Key takeaway? Don’t assume big PE funds always win, especially when they are up against big credit funds like Oaktree. More on those guys another day.
Thank you for reading!
Well thanks for making your way through that, I appreciate this is a slightly more complex deal than most. You’re a clever bunch, though.
On a completely random note, I truly hope none of you are getting screwed by this crypto and public market sell-off. Perhaps we’ll have a few crypto bankruptices to cover soon…
Further reading
FT, ‘What happens in Vegas… the messy bankruptcy of Caesars Entertainment’ (best title)
Mooney, Peng et al., ‘Caesars Entertainment Bankruptcy’
Data from Bloomberg.