Distressed debt investors are squaring off against Apollo and TPG, the private equity owners of Caesars Entertainment,
as the casinos and resorts group with properties from Caesars Palace in
Las Vegas to the Playboy Club in London’s Mayfair struggles to cope
with its $25bn of debt.
The two sides last week exchanged lawsuits, with debt investors charging that billions of dollars of Caesars’ properties and other assets had been improperly transferred out of its operating unit into a recently established property unit at artificially low prices.
The case Wilmington Savings Fund Society filed in Delaware Chancery Court on behalf of creditors further alleges that the transfers were fraudulent and charges that the company was now in technical default on its debt.
Apollo struck back. A countersuit brought by Caesars in New York State Supreme Court defends its actions and alleges that 35 funds resorted to aggressive tactics designed to drive down the cost of Caesars’ debt by, among other things, disseminating false statements in the press.
The suit, which asks for damages, alleges that the funds acted “against the best interests of the enterprise to inflate the value of credit default swap positions or improve other unique securities positions”.
The sparring comes as Apollo and TPG seek to keep
Caesars’ operating unit, which has almost $20bn in debt, out of the
bankruptcy court. The group’s earnings continue to deteriorate – net
operating losses ballooned to $2.2bn last year compared with a $320m
loss the year before – partly as a function of its interest burden and partly because its performance has yet to recover from the recession that followed the financial crisis.
Analysts say its flagship Caesars Palace in Las Vegas is in need of “refreshing”.While disputes are par for the course between creditors and owners of troubled leveraged buyouts, the fight over Caesars has been particularly ugly.
Caesars, which was taken private in a $30bn deal
in 2008, is only the latest of the debt-fuelled buyouts agreed near the
market’s peak that have struggled to remain afloat. At the end of April,
Energy Future Holdings, the biggest leveraged buyout in history, filed for bankruptcy protection with over $40bn in debt.
Ironically, in taking Caesars and its private
equity owners to court, creditors are trying to do to Apollo, which has a
long history of using distressed debt investments to take control of
companies, what Apollo has done to numerous of its private equity rivals.
Apollo is facing off against debt investors
including Appaloosa Management, Avenue Capital, Centerbridge Partners
and Oaktree Capital on Caesars. It has worked alongside these same
investors in the past to take control of companies owned by rivals
including CVC, KKR and TPG.
One of the most visible investors this time is Elliott Management,
which owns senior debt and has also bought credit protection on Caesars
which becomes more valuable as Caesars’ prospects dim, one of the
lawsuits charges. Elliott has been singled out in the countersuit for an alleged “blatant conflict of interest” since it could allegedly gain more on its credit default swaps than it will lose on its debt if Caesars files for bankruptcy protection. A spokesman for Elliott declined to comment.
Asset transfers from the operating company, Caesars Entertainment Operating Company, have left that part of the business leveraged almost 20 times, according to Kim Noland, an analyst with research boutique Gimme Credit. “The situation is so compromised that severely negative cash flow will ultimately require a restructuring that implicates all debt levels including the first lien debt,” she said.
Ms Noland and other analysts believe another debt restructuring is almost inevitable given the lack of cash flow and the drop in the value of the company’s assets. Executives from the two private equity groups concede that their 89 per cent equity in the operating unit is worthless.
Apollo and TPG, which invested about $1.4bn each
in the casino group, have marked their total Caesars holdings at 50
cents on the dollar. Caesars raised $16.3m selling 1.8m shares at $9
each at the time of its initial public offering in February 2012. The shares peaked at just under $26 this year but have since fallen to $11.47.
“The capital structure is unsustainable and a restructuring of some form is increasingly likely over the near term. The company will continue to burn cash to fund capital expenditures and interest payments, and we expect Caesars will need additional liquidity in 2015,” Standard & Poor’s analysts wrote in April, lowering Caesars’ rating to CCC-.
Even by the standards of most restructurings, Caesars is likely to involve messy wrangling in and out of court in the coming months.
“We would have always preferred to negotiate than to litigate,” says the co-head of one firm involved in the confrontation.
An executive familiar with the thinking of the Apollo group says “once the creditors issued the notice of default, we decided to take a more aggressive position”.
Mr Loveman points out the company has never missed a debt payment. He adds that Apollo and TPG are in talks with some classes of creditors and that an out-of-court settlement is possible.
In December, junior creditors, whose debt has little value, are owed a payment of $273m. That means more senior creditors are eager to work out an agreement with the company before that time to forestall any more cash leaking out of Caesars.
Junior creditors “are used to throwing their weight around”, says one person deeply involved on the Caesars side. “But they are out of the money. We have to maximise value for those who are in the money.”
