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Bonds issued at 100 trading at 12
By 2014 the senior secured debt to EBITDA ratio was said to be breached, which meant Caesars could declare bankruptcy. It did not want to, because bankruptcy would wipe out Apollo and TPG. So it kept trying to extend its runway.
The plan was to sell four properties to Caesars Growth Partners, the clean entity, with a goal of raising $2 billion in cash. The four-property deal got done, but it left the company worse off: it was set to lose $3 billion in revenue and $700 million in EBITDA.
When the deal closed, the junior bonds were trading at 12 cents on the dollar, bonds that had been issued at 100 cents. In the global financial crisis, investors usually expected something like 70 percent recovery on senior debt and maybe 40 percent on bonds.
Why do owners avoid bankruptcy so strongly?
In Chapter 11, shareholders sit last in line behind every creditor. A plan typically leaves them with nothing unless creditors are paid in full. Owners therefore have every reason to keep a company out of court, even when its debt is out of reach. Delaying can also give a business time to recover.
How are sales to an affiliate policed?
Loan and bond documents often require sales to affiliates to be on terms comparable to an arm's-length deal. Companies commonly obtain an independent valuation to show the price was fair. Creditors can challenge the price if it looks too low. Courts can unwind transfers made for less than reasonably equivalent value.
Why do junior bonds fall the hardest?
Junior bonds absorb losses only after senior debt is repaid, so a drop in asset value hits them first. Their price reflects the share of face value the market expects to recover. A price of 12 means the market expected roughly twelve cents back per dollar. Senior debt, backed by collateral, usually holds much more of its value.
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