Caesars Entertainment has reached an accord with the major creditors of its largest operating subsidiary that would give them a controlling stake in the casino giant and liberate the debt-laden subsidiary from a torturous, two-year reorganization under the protection of U.S. Bankruptcy Court.
The deal needs to be incorporated into the reorganization plan for the subsidiary, Caesars Entertainment Operating Co. and approved by Judge A. Benjamin Goldgar, who is overseeing the restructuring in Bankruptcy Court in Chicago. When that happens, Caesars itself will be restructured. The current owners, led by private equity giants Apollo Global Management and TPG Capital, will be reduced to minority shareholders, and CEOC’s creditors—bank lenders and senior and junior bondholders both—will own around 70 percent of Caesars’ equity.
The latter group, whose claims against CEOC were lower in priority to the banks and first-lien noteholders, ended up exerting the most leverage as the bankruptcy saga wore on and appears to have emerged from it as the biggest winner.
Led by billionaire David Tepper’s Appaloosa Management and Oaktree Capital, these second-lien bondholders rejected the compensation originally offered them. Instead they accused Caesars, Apollo and TPG of what amounts to an asset raid, improperly transferring the most valuable and financially healthiest of CEOC’s operations into other companies prior to placing the unit in Chapter 11 in January 2015 buried under some $18 billion of debt. They demanded that Apollo and TPG, which led a $30 billion leveraged buyout of Caesars Entertainment in 2008, contribute more to satisfy their claims, and they have been pursuing lawsuits accusing Caesars of violating bond agreements and reneging on promises to back CEOC’s obligations.
Caesars has denied the allegations throughout the bankruptcy process, saying the spinoffs were designed increase overall value, but the new deal should bring an end to the court battles. This is significant because the suits could have forced Caesars itself into Chapter 11, and as the revised settlement makes clear they proved to be a powerful incentive for Caesars, Apollo and TPG to remain at the bargaining table.
Under the newly sweetened deal, Appaloosa, Oaktree and other junior creditors, who are owed collectively about $5.5 billion, will recover $1.6 billion more than under Caesars’ previous offer—$1.2 billion of which will come in the form of cash from Caesars and stock in the parent company ceded by Apollo and TPG, along with the 14 percent stake Apollo, TPG and their partners in the 2008 buyout would have held in CEOC upon its emergence from Chapter 11.
The equity package is valued at about $950 million and works out to a recovery of around 66 cents on the dollar for second lien noteholders like Appaloosa and Oaktree, about 27 cents more than under the earlier plan, according to Caesars. Unsecured creditors will also receive 66 cents.
To help pay for the new settlement, senior creditors, including bank lenders and first lien noteholders, who were set to recover more than $11.7 billion, will receive 115 cents on the dollar, a penny less than under the previous plan, and 109 cents, respectively. Subsidiary guaranteed noteholders will get approximately 83 cents on the dollar.
Apollo and TPG will still retain equity in the new Caesars Entertainment, but not as much as had originally been planned. Shareholders not part of the Apollo-TPG private equity group will retain 6 percent of the equity. TPG and Apollo will still own some equity in the new company due to a merger between Caesars Entertainment and its non-bankrupt Caesars Acquisition Corp. Apollo and TPG currently own 65 percent of Caesars Acquisition, according to filings.
In exchange, Caesars, Caesars Acquisition, Apollo and TPG will be released from any future litigation. It also appears the deal will preclude the possibility that the personal wealth of Apollo co-founder Marc Rowan and TPG Chairman and founding partner David Bonderman would be forcibly released in future court battles.
“The sponsors ultimately had to relinquish their entire CEC ownership stake to obtain releases,” said Sarah Gefter, a senior analyst at Reorg Research. “Other creditor groups have also agreed to give up value in the interest of reaching consensus, however. Alongside the sponsors, first-lien creditors and the subsidiary guaranteed noteholders also gave up value to second lien creditors, bridging the gap and finally bringing the seconds on board with a global resolution.”
One of the majors among the junior creditors, Trilogy Capital Management, was still holding out, as of this writing, but experts say their opposition will not derail the new deal.
The new plan is slated to come before Judge Goldgar in January, and Caesars said it expects CEOC will be able to emerge from bankruptcy by the end of 2017.
