2021. Max Frumes and Sujeet Indap. Diversion books.
In the United States, bankruptcy law takes precedence over contract law. When you are taking out a mortgage loan, issue bonds, sign a lease or enter into an employment agreement, the transaction is entirely subject to the auspices of the United States and all of its laws, including determining the debtor’s right to hunt bankruptcy protection.
Max Frumes and Sujeet Indap convey this essential legal concept in , a real narrative in regards to the January 2015 Chapter bankruptcy petition of Caesars Entertainment Corp.’s principal operating unit, Caesars Entertainment Operating Company, Inc. (CEOC). 11 (reorganization) in the quantity of $18 billion.
A leveraged buyout of Caesars by Apollo Global Management and TPG Capital, accomplished just before the worldwide financial crisis of 2008-2009, resulted within the casino entertainment operator filing for Chapter 11 bankruptcy in early 2015. That bankruptcy pitted aggressive and deep-pocketed distressed debt hedge funds (creditors) against private equity owners Apollo and TPG. These creditors included senior bank loan holder GSO Capital Partners, senior bondholder Elliott Management Corporation, and second lien bondholders Appaloosa Management and Oaktree Capital Management.
The book offers an enchanting look into the distressed debt markets, including the strategies, colourful personalities and complicated relationships. Instead of shopping for undervalued stocks, these risk-taking hedge funds pay 50 to 70 cents on the dollar to amass controlling stakes in troubled corporations.
U.S. bankruptcy law is taken into account to be very “borrower-friendly,” in contrast to British and Canadian bankruptcy law, which may be very “lender-friendly.” In January 2017, CEOC received court approval for a plan to scale back $10 billion in debt and separate its U.S.-based real estate assets from its gaming operations. The company was finally capable of emerge from bankruptcy in October 2017. As a part of the reorganization plan, Caesars Entertainment merged with one other subsidiary, Caesars Acquisition Co., to reunite its casinos and hotels under one roof. This latest group was designed to draw latest millennial customers, offsetting an expected decline in the normal slot machine business as a result of baby boomers retiring. Apollo and TPG ultimately retained a combined 16% stake in the brand new Caesars, which was controlled by creditors, but didn’t own any shares within the REIT that housed the true estate assets.
The most significant takeaway from this book for business and finance professionals is the potential for value creation through corporate restructuring. A company restructuring is a big event that affects not only lenders, shareholders and employees, but additionally the relationships between corporations and their corporate customers, suppliers and competitors. It is the method by which corporations renegotiate the financial contracts they’ve entered into with their creditors and other stakeholders, typically in response to a financial challenge. A company restructuring effectively represents a “re-division of the corporate pie” or the rehabilitation of a “sick” capital structure.
In Caesars Chapter 11 bankruptcy, the distressed debt investors weren’t only financially astute. They also weaponized the law, using their knowledge of the dense legal language in loan agreements and bond contracts to realize the upper hand in boardroom negotiations and courtroom showdowns.
Many readers of the book will likely be very critical of the scorched earth tactics of Apollo, its allies, its lawyers and lobbyists. According to Frumes and Indap, private equity firms like Apollo massively mistreated their creditors in 2015, using legal documents and hard bargaining tactics to attempt to “extract” value from loan and bond creditors that was not rightfully theirs. All creditors tried to maximise their repayments, with senior creditors receiving over 100% and junior creditors receiving just 65 cents on the dollar.
The book describes how Caesar’s senior creditors practically begged Oaktree and Appaloosa (the creditors of the subordinated bonds) in the ultimate hours to desert their aggressive efforts because they threatened a fragile compromise with Apollo.
Ultimately, this book provides a superb account of what modern high finance and non-performing loan markets are literally like, detailing the bitter financial and court wars, the stress and the screaming. It tells an enchanting story of the clash between distressed hedge funds battling private equity giants for his or her share of a legendary Las Vegas casino conglomerate.
If you enjoyed this post, do not forget to subscribe.
