The Exchanges

Q Well, Max, I want to turn it over to you now because it's not just a couple of pools of capital and some players in this particular case that show up. We had this capital structure. We know we have Apollo and TPG moving some assets around. Who else shows up for the dance and what happens from there?

A In distressed debt investing, corporate restructuring, what generally happens is distressed debt investing hedge funds take a position in a certain crunch of debt. And They will organize with other creditors in that same tranche of debt and form what are called ad hoc groups and then get legal counsel and financial advisors that then can concentrate on how to position themselves, A, with respect to the company and the company's financial advisors and legal advisors. And B, with respect to other creditors. And this is what really starts to happen in 2014. Some of these creditors have been in and out of the company's debt because they started trading at a discount almost immediately after the LBO. In 2009, they started doing distress exchanges. Oak tree was probably the main example of a large fund with multiple investments in Caesars from the very beginning. And by 2014, one of their largest position was in the second lien bonds. Another fund that is known for distressed debt investing is also California, Los Angeles based fund. Canyon capital partners, a couple of Drexel alums run, run that fund as well. And they held up a large position in the second lien bonds as well. And they start coordinating with Oaktree and at least just analyzing their position. They hired very fortuitously a law firm by the name of Jones Day, who's head of restructuring. It was a, uh, not only a great…

AI assessment note: “Oak tree was probably the main example of a large fund with multiple investments”

Q OpCo and a PropCo, and then through these series of transactions, there's new entities. And Apollo and TPG took some of the assets that were in the OpCo and capitalized those new entities and bought those assets at some transfer price. All along, there's a parent, a top of the holding company that has a guarantee on all the debt. That supports all of those businesses. I get that right?

A That's exactly right. Ostensibly, they're all connected. This is all one big organization working together. And that's when we arrive at early, 2014. Follow mainly Mark Rowan, along with his deputy and one of the key appall executives leading the case on this David Sandberg. Start negotiating with some of the term loan lenders to perform a transaction called the B seven. In the B seven term loan, essentially at that point, there's term loan debt and that sat at the top of the capital structure at the Opco. The credit documents allowed for additional senior debt to be raised. So at the time they had Like, 1.752 billion dollars of capacity to raise more first lien debt under credit docs, but who's going to want to lend to this company that seems like it can't make its interest payments. And in order to do that, they started negotiating with a gentleman by the name of Ryan Mollett, who's the point person for the Caesars investment for the credit investing arm of Blackstone called GSO. And along with GSO, there's another firm, one of the hugest asset managers out there in BlackRock that also owns some of the term loan. And they offered them very, very generous fees, among other things, to participate in this transaction that accomplishes three things. One, it's gonna give them some liquidity to refinance out some of their other debt. Two, it's going to remove the most onerous coven…

AI assessment note: “That's exactly right. Ostensibly, they're all connected.”

Q We're in the case. We've got these big guys fighting against each other. And Max, why don't you rip through the highlights here of what the twists and turns are and where it ends up?

A The case starts off with the, like, I guess the second lien is trading at 1015, 20 cents on the dollar. First lien bonds trading, let's say, 75, 80, and then the term loans around 90. Throughout the course of the case, there's, like Judith mentioned, a lot of The pressure around whether or not they're going to allow these lawsuits to go forward or not. And ultimately, an injunction is put in place and up until the threat of it being lifted forces everyone to come to the table for certain negotiations. Meanwhile, the company is improving without paying two billion dollars in interest. They're able to invest in New renovations for the casinos, capital expenditures to make improvements that then start bringing the business back. The economy starts picking up. And so over time, the actual results are improving. So this debt starts picking up in the secondary and they're constantly Just 10 cents apart between Apollo's offer to the second liens and what the second liens actually want. The most important thing that happened in the case was the examiner's report. We joke that he's our third coauthor. Richard Davis, a former Watergate prosecutor, chosen as an examiner at the beginning of the case and gets deep access and interviews, you know, 75 different people who are designing and behind these transactions. Goes through millions of documents with a team of advisors and ultimately com…

AI assessment note: “The case starts off with the, like, I guess the second lien is trading”

Q a TPG for being aggressive, but I don't quite understand why if you were, let's say, a GSO or a BlackRock who are lending and are at risk of that aggressive behavior, you wouldn't find a way to increase the cost of capital to those private equity firms relative to others that might not take such hard lines. How does, how does that play out in the markets over time?

A Hit the nail on the head. It's really difficult to impose your will as a creditor in these markets because of the proliferation of CLO funds and capital going towards leveraged loans has exploded. So there's so much demand for leveraged loans because of CLO funds and then the increasing amount of high yield funds that are also looking for bond debt that these more sophisticated investors or someone who would, who would know or has the lawyers to negotiate for better documents can't do it. They're all very loose. They're all covenant light, and there's increasing loopholes. Even in post-pandemic right now, we're seeing companies that are pretending like, 20, 20 never happened. And just using 2019 EBITDA as a gauge for where their, their actual leverage is going to be going forward, and they're able to raise debt. And so it's very difficult in that environment, even though you know what's coming, to have negotiating leverage with a leveraged loan or a bond issuer. So we'll see these funds that are looking for maybe smaller privately negotiated loans, the ESG factors, anything that maybe is non ESG, they'll go off the run, provide a huge loan to a cannabis oriented business, or start investing some side pockets into SPAC deals and playing some sort of SPAC arbitrage depending on how flexible their fund is. Even though they know it's coming, they can't do anything about asking for …

AI assessment note: “It's really difficult to impose your will as a creditor in these markets”

Q With all the twists and turns coming into and then through the bankruptcy, how do you think about skill versus luck of each of the participants along the way?

A I guess luck favors prepared in these cases, and it's a combination of both. That's why they call them hedge funds. They're going to have multiple bets. They'll put money towards as much like asymmetric risk reward deals as they can. And if they have success, they'll continue to try it. Just like Dave Miller Home run with this incredibly innovative convertible preferred instrument that he just slipped into the RSA and continued to get like re-upped as the Caesars case went on. It probably made Elliott nine figures. They looked for similar types of deals later on, I think in Claire's and elsewhere, and it wasn't the same. It's more difficult to continue to do. I think that it's that level of sophistication and putting a weighting on How likely these legal claims are to be successful and then having the conviction to go with that. It's going to be a combination of the two, but ultimately I think a fund like David Tepper, you're going to have someone who is not only lucky and skilled, but is unflappable. And I think that's where a lot of distressed investing gains probably a good reputation for being able to not show fear at these times when there's an incredible uncertainty. If they feel they really know the market, and that's what happened here.

AI assessment note: “luck favors prepared in these cases, and it's a combination of both.”

Q So Max, now we're going through the bankruptcy and you're going to have two sides. You're going to have the equity holders, Apollo and TPG saying, hey, there were no covenants. We followed through this covenant light documents and the debt holders saying, you just stole all these assets from us. How does it play out?

A A couple steps before we get to the bankruptcy, because this was key, and there was several different ways that they tried to release the parent guarantee. And so before Caesars files for bankruptcy, this group of aggrieved hedge funds hires a smaller law firm. You know, it was Drinker Biddle at the time. Now it's Fager Drinker Biddle, a lawyer by the name of Jim Millar. He has an argument that says that this violated a depression era, a law that governs securities known as the Trust Indenture Act. And this is essentially the sacred rights of all high yield indentures that everyone is guaranteed the right to payment plus interest at a certain maturity. And in order to amend those, you're going to need to get a hundred percent of the creditors on board. And if you don't, then that's a violation there. He starts to get traction with this lawsuit right before they file. The Apollo and TPG, meanwhile, lock up just one tranche of creditors. And this is significant. I knew we hadn't quite gotten to Who the so-called ally was for Apollo and Caesars going into bankruptcy, which is the holders of the first lien notes. So the first lien notes at this point fall just under the term loan in terms of priority. So the first lien notes now trading at a discount and could claim to be what we call the fulcrum security going into a bankruptcy, which is the first tranche of debt that is compromis…

AI assessment note: “A couple steps before we get to the bankruptcy, because this was key”