In an unstable economy, bond payment failures take on added import as bellwethers of ailing markets.
Especially when they involve large, well-known corporations.
On December 15, Caesars Entertainment Operating Co. Inc. (Nasdaq: CZR) failed to make a $225 million interest payment on its 10% Second Lien Notes due 2018.
CZR has a 30-day grace period to make the payment or be declared in default.
On Friday, December 12, it was reported that negotiations with senior creditors regarding a debt restructuring had broken down.
This comes as no surprise to those of us who have been watching one of the ugliest situations in the debt markets unfold over the past couple of years.
But it does reveal a surprising buying opportunity…
Meet the Private Equity "Sponsors" Stripping Caesars Clean
Indeed, the entire situation and the players involved deserve particular scorn as this sham transaction has unfolded.
Asset stripping, equity dilution, and $4 billion in corporate value that's disappeared are just small parts of the story.
What's happening now is the start of an endgame that will leave you shaking your head, and thankful if you were not one of the investors who stands to lose money…
On November 25, UMB Bank, the Trustee for Caesars Entertainment Operating Co. Inc.'s 8.5% Senior Secured Notes due 2020, filed a devastating lawsuit against Caesars Entertainment Corporation, affiliated companies, and the companies' directors and officers.
The lawsuit is an attempt to salvage one of the most ill-begotten leveraged buyouts in history, and at the same time a comprehensive and powerful indictment of a scheme perpetrated by Caesar's private equity owners, Apollo Global Management LLC (NYSE: APO) and the "Sponsors," Texas Pacific Group (TPG).
It catalogues over $4 billion of value that has been shifted away from Caesars Entertainment Operating Company to two other entities under the control of the Sponsors, Caesars Growth Partners, LLC, and Caesar Acquisition Company.
By all accounts, this effort has been led by Apollo, which has managed to build a formidable investment firm after almost collapsing during the financial crisis and then managing to recover despite a history of mistreating creditors in its private equity deals and being widely distrusted on Wall Street.
The lawsuit was masterfully drafted by a skilled team of lawyers led by the firm Quinn Emanuel Urquhart & Sullivan, LLP, a firm I have some experience with and know to be extremely formidable litigators. Apollo is conducting itself as though this lawsuit does not pose a threat to its business and reputation, but it is sorely mistaken.
The thoroughness with which the Sponsors have looted Caesars over the past couple of years can only be described as deliberate, pathological, and potentially criminal; a vulture could not have done a better job picking the corpse of CEOC clean.
The Sponsors' behavior includes all of the hallmarks of a desperate borrower, including transparent attempts to avoid both the plain language and clear spirit of indentures as well as transactions approved by conflicted directors and blessed by hired gun lawyers and investment bankers issuing phony fairness opinions.
One has to marvel at the gall of Apollo for thinking that anyone would be fooled by antics that wouldn't fool a five-year old child and don't stand a chance of fooling a federal bankruptcy judge.
Some of the most powerful investors on Wall Street are challenging the Sponsors' actions and are unlikely to go away quietly as the UMB Bank lawsuit clearly suggests.
Indeed, this all could've been avoided had the Sponsors engaged in even a modicum of good corporate behavior…
Following the Lack of Moral and Ethical Behavior
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.