Apollo Built a Clean New Caesars and Moved the Good Casinos Into It
The new company had no old debts, so it could borrow again, while the old company kept the loans but lost the casinos meant to repay them.
The Wall Street Skinny · Restructuring 101: How Private Equity Pits Debt Investors Against Each Other | Caesars Part 2/3The plan started with a new shell company that had no assets and no debts.
With its casino operating company running short of cash to pay its debts, Apollo, the private equity firm that co-owned Caesars with TPG, set up a new company called Caesars Growth Partners. It had no debt, no crushing interest payments, and no claim from old lenders. Apollo put in fresh cash, raised new borrowing against the clean balance sheet, and then had the new company start buying casinos out of the old one.
The owners moved the good assets from a company that owed billions into a company that owed almost nothing, leaving the old lenders with the old debts but without the casinos and cash flow that were supposed to back them up. Normally senior lenders are protected and owners lose first, but here the lenders lost the assets that backed them.
Apollo chief executive Mark Rowan drove the design. Rowan was known for restructuring skill and a willingness to push to the edge of the rules. He had help. Big law firms that had written some of the loan protections helped interpret those same protections to allow the transfers, and investment banks hired to bless the prices did so through fairness opinions.
The price set for the transfers decided who gained, and nobody spoke for the old lenders on it. When assets move from one company to another, some value has to change hands, and bankers set the price. In this case, there was no independent adviser for the creditors of the old operating company on what the casinos being sold from under them were actually worth.
In one instance, Apollo's side argued that the exchange of value was the old company no longer having to pay its own bankruptcy costs.
The four-property sale showed the imbalance. Caesars Growth Partners was set to get about $2 billion in cash for four properties, but the old company was set to give up about $3 billion in revenue and about $700 million in EBITDA. From 2014 to 2016, the company paid down only $185 million of debt, because it kept borrowing just to stay afloat.
Lenders saw what that meant. After the four-property sale was completed, junior bonds originally sold at face value were trading down to about 12 cents on the dollar.
Questions people ask
What was the operating company, and why did it matter?
The operating company is the part of Caesars that actually ran the casinos and produced the cash used to pay lenders. In the buyout, debt was tied to that cash flow, so when casinos were sold out of it, lenders lost the source of repayment.
What is a fairness opinion?
A fairness opinion is a letter from an investment bank saying a sale price looks reasonable. It is not a market test or an auction, and here the banks were hired and paid by interests tied to the buyer, with no matching adviser for the old lenders.
How could moving collateral away from lenders be allowed?
Loan agreements contain covenants, or written limits on what a borrower can do. Apollo argued the documents allowed asset sales to a new affiliate, an interpretation made easier because large law firms involved in the deals had drafted some of that language.