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$70 million bought casino control
Caesars did not have enough money lying around to pay its tax bills, but it still wanted to grow, and acquisitions are one way companies do that. So Apollo and TPG looked at the competition around the Las Vegas strip for someone else having a hard time. Across the street, Planet Hollywood looked like it was really struggling.
They started quietly acquiring the junior mortgage debt of the Planet Hollywood casino. They spent on the order of $70 million for $300 million of face value, and by early 2010 they had converted that debt into a controlling equity position in the casino.
That is called distress for control: buy a failing company's debt cheaply and end up owning the company. It is one of the strategies in distressed investing. They bought other things too, including an Israeli gaming company, when poker and online gambling were a frenzy.
Why is junior mortgage debt so cheap?
A junior mortgage is repaid only after the senior mortgage on the same property. If the property is worth less than the senior debt, the junior lender may get little or nothing. That risk pushes its price far below face value. In foreclosure, sale proceeds go to the senior lien first.
How does buying debt turn into owning a company?
In a restructuring, the class of debt where value runs out is called the fulcrum security. Its holders typically receive the company's new equity in place of repayment. Someone who has bought enough of that debt can end up with a controlling stake. This approach is known as loan to own.
Why did online poker boom around 2003?
Chris Moneymaker won the 2003 World Series of Poker Main Event after qualifying through an online satellite that cost $86. He took home $2.5 million. His win convinced many amateurs that they could do the same, and online poker sites saw a surge of players. A 2006 US law restricting payments to gambling sites later curbed the boom.
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