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Paulson swapped $1.1 billion for equity
Paulson made something like $4 billion as a winner out of the 2008 mortgage crisis, and he was a huge believer in the Vegas comeback. After Caesars was taken private, he started buying its unsecured bonds. They sit low in the capital structure, carry no security, and pay a higher interest rate because they are riskier.
He wanted a better trade than a bond. He went to Apollo and TPG and exchanged about $1.1 billion of those unsecured bonds for a 16% stake in the Caesars parent, at a valuation of $4.5 billion.
That figure is the equity value, not the whole company. The buyout had been $30 billion, with $6 billion of equity and $24 billion of borrowed money, so a parent valued at $4.5 billion in equity was already worth less than the equity put in.
Why do unsecured bonds act like equity?
Unsecured bonds have no collateral, so they are paid after secured lenders. They absorb losses before more senior debt does. Their price therefore moves with the company's fortunes, as stock does. They still rank ahead of shareholders in bankruptcy.
How does a debt-for-equity swap work?
A creditor gives up bonds and receives newly issued shares. The company's debt falls and its interest bill shrinks. The creditor trades a fixed claim for ownership and its upside. The exchange rate between the two comes from negotiating the value of the equity.
How did Paulson profit from the mortgage crisis?
Paulson & Co. bet against subprime mortgage securities starting in 2006, much of it through credit default swaps. When the housing market turned, those positions soared in value. Gregory Zuckerman's book The Greatest Trade Ever tells the story. Paulson's personal earnings from the trade were reported at about $4 billion.
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