Book Review: The Caesars Palace Coup

The Caesars Palace coup: How a billionaire fight over the famous casino exposed the power and greed of Wall Street. 2021. Max Frumes and Sujeet Indap. Fun books.

Bankruptcy law trumps contract law in the United States. When you obtain a mortgage loan, issue bonds, sign a lease or enter into an employment contract, the transaction is entirely under the auspices of the United States and all of its laws, including specifying the debtor’s right to present the bankruptcy protection.

Max Frumes and Sujeet Indap convey this fundamental legal concept in The Caesars Palace coup: How a multibillion-dollar fight over the famous casino exposed the power and greed of Wall Streeta factual narrative of the January 2015 $18 billion Chapter 11 (reorganization) bankruptcy filing under the US Bankruptcy Code of Caesars Entertainment Corp.’s principal operating unit, Caesars Entertainment Operating Company, Inc. (CEOC).

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A leveraged buyout of Caesars by Apollo Global Management and TPG Capital completed just before the 2008-2009 global financial crisis caused the casino entertainment provider to enter Chapter 11 bankruptcy protection in early 2015. This bankruptcy faced aggressive and deep distressed debt coverage. funds (creditors) against private equity owners Apollo and TPG. Those creditors included first-lien bank loan holder GSO Capital Partners, first-lien bondholder Elliott Management Corporation and second-lien bondholders Appaloosa Management and Oaktree Capital Management.

The book offers a fascinating insider’s account of the troubled debt markets, including the strategies, colorful personalities and complex relationships. Instead of buying undervalued stocks, these risky hedge funds pay 50 to 70 cents on the dollar to gain controlling stakes in troubled companies.

US bankruptcy laws are considered very “borrower friendly”, unlike UK and Canadian bankruptcy laws which are very “lender friendly”. In January 2017, CEOC won court approval of a plan to eliminate $10 billion in debt and separate its U.S. real estate assets from its gaming operations. The company finally emerged from bankruptcy in October 2017. As part of the reorganization plan, Caesars Entertainment merged with another subsidiary, Caesars Acquisition Co., with the goal of regrouping its casinos and hotels under same roof This new group positioned itself to attract new business from millennials to offset an expected slowdown in its traditional slot machine business as baby boomers retire. Ultimately, Apollo and TPG retained a collective 16% stake in the new Caesars, which was controlled by creditors but did not own any equity in the REIT that housed the real estate assets.

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The main takeaway from this book for business and finance professionals is the potential to create value through corporate restructuring. Corporate restructuring is a major event that affects not only lenders, shareholders and employees, but also the relationships between companies and their corporate customers, suppliers and competitors. It is the process by which companies renegotiate the financial contracts they have entered into with their creditors and other stakeholders, usually in response to a financial challenge. Corporate restructuring effectively represents a “sharing of the corporate pie” or the repair of a “sick” capital structure.

In Caesars’ Chapter 11 bankruptcy, distressed debt investors weren’t just financially astute. They also weaponized the law, using their knowledge of dense legal terminology in loan agreements and bond contracts to gain the upper hand in boardroom negotiations and courtroom confrontations.

Many readers of the book will be highly critical of the scorched earth tactics of Apollo, his allies, and their lawyers and lobbyists. By 2015, in Frumes and Indap’s view, private equity firms like Apollo had become highly abusive of creditors, using legal documents and hard-line negotiation tactics to “grab” value from loans and bondholders that did not rightfully belong to them. All creditors sought to maximize their recoveries, with senior creditors set to receive more than 100% and junior creditors awarded close to 65 cents on the dollar.

The book describes how in the final hours, Caesar’s senior creditors were essentially asking Oaktree and Appaloosa (the second-lien bondholders) to back off their aggressive efforts, which jeopardized a delicate commitment to Apollo.

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Ultimately, this book provides an excellent account of what modern high finance and distressed debt markets are really like, describing the bitter financial and legal warfare as well as the stress and the shouting. It tells a fascinating story of the clash of distressed hedge funds battling private equity giants for their share of an iconic Las Vegas casino conglomerate.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

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Mark K. Bhasin, CFA

Mark K. Bhasin, CFA, is a senior vice president at Basis Investment Group, LLC, New York, and an adjunct associate professor at New York University’s Stern School of Business.

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