Caesars Deal Boosts Appaloosa After Apollo, TPG Give Ground

  • David Tepper’s fund more than doubles recovery in casino case
  • Private-equity firms would see ownership stake in company drop

The long and often ugly battle over the fate of Caesars Entertainment Corp. may finally be nearing an end.

After more than two years of contentious legal disputes, Apollo Global Management LLC and TPG Capital -- the private-equity firms that controlled the casino giant -- and its biggest creditors struck a deal to reorganize the company, and enable its operating unit to emerge from bankruptcy with less debt.

The settlement is a win for creditors led by David Tepper’s Appaloosa Management, which held more than $880 million in second-lien bonds at the heart of the fight. For Apollo and TPG, which will give up most of their stakes, it’s a humbling outcome after several unsuccessful attempts in recent years to salvage their investment. But the firms, which acquired Caesars in a $30 billion leveraged buyout in 2008, did find a way to share their pain.

To fund the agreement announced Tuesday, Apollo and TPG will see their more-than 60 percent ownership shrink to about 16 percent once Caesars combines with its sister company Caesars Acquisition Co. 

“It looks like they put a lot of money on the table,” Bruce Grohsgal, a bankruptcy professor at Widener University’s Delaware Law School, said in an interview. “It probably changes the dynamic” of the bankruptcy case, he said.

In return Apollo, TPG and their top executives will be insulated from bondholder-backed lawsuits stemming from the reorganization seeking to hold them responsible for the bankruptcy of Caesars Entertainment Operating Co. 

The accord, which requires a judge’s approval, would end those court fights and reorganize the non-bankrupt pieces of Caesars and the insolvent operating unit. If Caesars nails down support from a majority of each class of creditors, from senior bank lenders to unsecured bondholders, it would be more difficult for any remaining dissidents to fight the reorganization plan, Grohsgal said.

Chicago Trial

The deal must be incorporated into the operating company’s reorganization plan, which is scheduled to go before U.S. Bankruptcy Judge A. Benjamin Goldgar in Chicago in January. With his approval, the Las Vegas-based casino giant would emerge with lower debt and new owners.

Second-lien bondholders, owed about $5.5 billion and led by Appaloosa, will see a recovery rate of about 66 cents on the dollar, or about 27 cents more than under a previous plan, according to a Caesars statement. Other investors in this group included Centerbridge Partners, Oaktree Capital Management LP, and Tennenbaum Capital Partners. All four money managers profited on their holdings, according to people with knowledge of the matter.

Spokesmen for Appaloosa and Oaktree declined to comment. Representatives for Centerbridge and Tennenbaum didn’t immediately respond to requests seeking comment.

The 10 percent bonds, which are due in 2018, fell Tuesday by around 0.88 cents on the dollar to 62.5 cents after trading as high as 65 cents, according to Trace, the bond-price reporting system of the the Financial Industry Regulatory Authority. 

Under the plan, Caesars Entertainment shareholders not affiliated with Apollo and TPG will also take a hit, seeing their stake in the company drop from about about a third to about 6 percent. The shares fell $1.47, or about 16 percent, to $7.99 at 12:57 p.m. in New York trading.

“Although cognizant that a lot of work remains to be done, the committee is pleased with where we are and looks forward to wrapping up the case,” said Bruce Bennett, the bankruptcy attorney who led the bondholders’ case against Caesars.

Staunch Opponents

The second-lien group had been the staunchest opponent of Caesars throughout the bankruptcy -- which began in January 2015 -- fighting to force the company to contribute more to the reorganization if it wanted to end bondholder litigation in New York and Delaware. 

The final concessions from Caesars were announced after Goldgar last month lifted a legal shield that had been delaying the lawsuits against Caesars, Apollo, TPG and their executives.

“The prospect of rulings in the New York and Delaware litigation were probably the most important factors in focusing the parties and facilitating progress,” Bennett said in an interview.

Caesars spokesman Stephen Cohen declined to comment for this story.

Recovery rates for first-lien bank lenders and subsidiary guaranteed noteholders decrease by about 1 cent under the new plan, while rates for first-lien noteholders remain the same. Creditors will get about 70 percent of the fully diluted equity in the new Caesars structure, according to the statement.

Sweetened Offer

To woo the lower-ranking second-lien investors, Caesars unveiled a proposal on Sept. 21 that offered to increase their payout by about $1.6 billion. Approximately $1.2 billion of that would come from the non-bankrupt Caesars parent in the form of cash and stock, while more-senior creditors, including lenders and first-lien bondholders, were called upon to give up some of the more than $11.7 billion they were set to recover.

The groups negotiated throughout the weekend before arriving at terms all sides could agree upon.

Caesars had originally offered about $4 billion toward the reorganization, but the second-lien bondholders held out for more, saying the company had improperly shifted valuable assets out of the operating unit before putting it into bankruptcy. They were pursuing lawsuits that accused the parent of violating bond agreements and abandoning promises to back the operating unit’s obligations.

Caesars has said it did nothing improper and that its actions were honest attempts to reorganize the heavily indebted unit.

Some Equity

Apollo and TPG were also targeted by the second-lien bondholders, who demanded that the private-equity firms contribute to creditor recoveries. Under the proposal spelled out Sept. 21, the firms would still retain equity in the reorganized Caesars, but not as much as originally planned.

The deal won’t end all opposition. Trilogy Capital Management LLC will continue pursuing its $160 million lawsuit in New York, Barry Kupferberg, director of research for the investment fund, said Monday. Trilogy sued Caesars in 2014, claiming the company violated federal law when it restructured some unsecured debt, paying some holders more than others. 

Trilogy is owed about $22 million and is pursuing the lawsuit on behalf of unsecured bondholders owed about $160 million.

The case is In re Caesars Entertainment Operating Co. Inc., 15-01145, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

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