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Bonds that went from 10 to 100
While the bankruptcy was unfolding, the economy was recovering, and Caesars creditors were being paid back in stock. They received shares in the Caesars parent, and the property company came out the other side under a new name, Vici.
Those shares soared along with the overall market. Hedge funds ended up with payouts far higher in nominal terms than what had been agreed during the bankruptcy proceeding.
The second lien bondholders show it most clearly. At the outset of the bankruptcy their bonds traded at 10 cents on the dollar. By the time Caesars emerged on October 6, 2017, they were up to 65 cents, and they eventually reached 100 cents on the dollar because of the recovery in Caesars shares.
Why do bonds trade at 10 cents?
A bond's price is the market's estimate of how much of its face value will be repaid, weighted by risk. At 10 cents, investors expected about a tenth of face value back. Bonds are quoted as a percentage of face value, with 100 as par. Prices move as the odds of repayment move.
Why are second lien bondholders paid later?
A lien is a claim on specific collateral. A second lien can collect only after the first lien claims on that collateral are paid in full. In exchange for that lower position, second lien debt pays higher interest. An intercreditor agreement sets this ordering in writing.
How do creditors end up owning stock?
In Chapter 11, a plan of reorganization can swap creditors' claims for shares of the reorganized company. This cuts debt without paying cash that the company lacks. The creditors' payoff then depends on the share price. The plan needs creditor votes and confirmation by the bankruptcy judge.
How did the property company become Vici?
VICI Properties was formed from the property side of Caesars and emerged with the bankruptcy in 2017. It was structured as a real estate investment trust, which owns property and leases it to operators. VICI listed on the New York Stock Exchange in February 2018. REITs must distribute at least 90 percent of taxable income to shareholders.
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