Creditors turned 10 cent Caesars bonds into 100 cents and beat Apollo

Oaktree, an investment firm holding Caesars debt, and a group of other junior creditors had been pushed to the bottom of the pile. They banded together and filed papers forcing the casino company into involuntary bankruptcy, a legal move where creditors drag a company into court instead of waiting for the company to file itself.

That filing froze everything. For years, Apollo and TPG, the private equity firms that owned Caesars, had been moving assets, cutting side deals, and reinterpreting loan contracts to protect themselves. One of their most aggressive moves, severing a parent company guarantee to creditors, came down to how a judge would read a single sentence in an earlier ruling. Now a judge would have to decide who actually stood where.

This is the story of how the creditors won anyway. After about two years of all out war among holders of junior bonds and bank loans with different claims to collateral, and the private equity owners, Elliott, a hedge fund that owned Caesars debt, walked away with about a $1 billion windfall. Second lien bonds that had traded for 10 cents on the dollar recovered to 100 cents. For Apollo and TPG, which had tried to steamroll the lenders, it was not a great investment, though the exact amount they lost was not specified.

Elliott was positioned to win because it had bought insurance. Along with its bonds, it bought credit default swaps, contracts that pay off if a borrower fails. The sellers were other investors who believed bankruptcy would never come, so they were effectively doubling down on their bet that Caesars would survive. As bankruptcy approached, the value of Elliott's insurance rose, and it changed what Elliott wanted from the fight.

Think of bankruptcy like a freeze in a game where everyone stops moving. At that moment, everyone's position freezes. Whoever is best positioned at that instant has the advantage in the long court battle that follows.

The battle lasted about two years under an eccentric judge who, in one account, would talk to himself. Lawyers and bankers collected about $273 million in fees from the Caesars estate, almost double the fees paid on Facebook's stock market debut, including $79 million to the law firm Kirkland and Ellis alone. A final deal was completed just days before Donald Trump became president in 2017.

By then the economy was recovering, and creditors were being repaid in shares of the reorganized company, including shares in the property company renamed Vici. As the stock rose, payouts grew far larger than first expected.

The creditors emerged from bankruptcy on October 6, 2017 with second lien bonds valued at up to 65 cents on the dollar, up from 10 cents at the outset. Those bonds then rose to 100 cents as Caesars shares recovered. That was a 90 percent gain per share from the bottom, or roughly $5 billion in total value gained.

In a perverse way, Mark Rowan and David Sambar of Apollo had been vindicated. Once Caesars no longer had to make crushing interest payments, the business could invest and rebound. But all of that new value was seized by the creditors, not the private equity owners who engineered the maneuvers.