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Caesars tactics became the playbook
Apollo was on both sides of the asset transfers. Its big law firms had written a number of the covenants themselves, so they could read a covenant and decide it could be interpreted their way. As more deals were done internally, the documents were written by whoever's lawyers set them up more advantageously.
Apollo's CEO, Marc Rowan, was a brilliant restructurer who was smart about maximizing what Apollo would get, and he was not afraid to push the edge of the envelope. There were never any rules to stop him.
Since then, creditor-on-creditor violence has become standard operating procedure in liability management exercises. The tactics are spelled out as strategies in the credit investors' handbook. A company doing well has no need for them, and they show up as companies get into trouble.
How do loose covenants enable these deals?
Covenants usually include exceptions, called baskets, that permit limited asset transfers and new borrowing. Those exceptions are written by the company's lawyers and accepted by lenders. Read in the company's favor, a basket can permit transactions the lenders never expected. Loans with few covenants, called covenant-lite, became far more common after the financial crisis.
How have lenders pushed back on these tactics?
Lenders added provisions to loan documents that bar moving valuable assets to unrestricted subsidiaries, nicknamed J.Crew blockers after a 2016 transfer of intellectual property by that retailer. Groups of lenders also sign cooperation agreements, pledging to negotiate together rather than be split. These pacts make it harder for a company to cut a deal with only some creditors.
Why do these tactics surface in downturns?
A healthy company can refinance on normal terms and has no reason to fight its lenders. When cash runs short, managers and owners look for ways to buy time or improve their position. That is when the loopholes in loan documents get tested. Rising interest rates since 2022 pushed more companies into that position.