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The debt-free black box company
The clean company
They called it Caesars Growth Partners. It had none of the problems of the Caesars parent, the operating company, or the property company. Cash went into it, new debt was raised against it, and it bought assets from the operating company, the part of the business that does the heavy lifting and is supposed to send its cash flows up to the parent.
Because the new entity carried no legacy debt, it could raise a bunch of new debt of its own.
What creditors lost
For anyone holding debt backed by the operating company's cash flows, the effect ran the other way. The value of their bonds fell, and everything they had a claim to was now propping up the new clean entity. Their ability to get recourse if things kept going south was stripped away.
Creditors who should have ranked senior, with the best outcome if something went wrong, lost their rights. The equity holders who are supposed to be wiped out first were the ones who built the new entity, and it had never really happened before.
Why can a new company start with no debt?
Debt belongs to the legal entity that borrowed it. A separate company is its own legal person, so lenders to one entity generally cannot collect from a sibling company. This principle is called corporate separateness. Courts can look past it in narrow cases, such as when a transfer is found to be a fraudulent conveyance.
Why do equity holders get wiped out first?
In bankruptcy, claims are paid in a set order: secured creditors first, then unsecured creditors, then shareholders last. Shareholders accept this in exchange for owning all the upside when a company does well. The ordering is known as the absolute priority rule. It is codified in Section 1129 of the US Bankruptcy Code.
How do bond terms limit moving assets out?
Bond contracts, called indentures, often contain covenants restricting asset sales, new debt, and payments to affiliates. Those restrictions usually come with carve-outs, called baskets, that allow limited transactions. Companies and their lawyers read the baskets closely to find what the text permits. The exact wording decides whether a transfer is allowed.
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