The Exchanges

Q in this case, you've got huge, well-resourced players on both sides, right? You've got Apollo, TPG on one side. You've got Oaktree, as you said, Appaloosa comes in on the other side. I'm curious as this goes through, and let's take a step back from this restructuring, generally look at all restructurings. How much does the size and the power of the individual players make a difference in the outcomes?

A That's an interesting question. I think you have to look at the cases that are either in chapter 11, which is a formal bankruptcy, and those cases that are not. And so that kind of balance of power, I think, makes a big difference when you're trying to do something out of court and avoid a bankruptcy filing where large players take big stakes in capital structures, and because they have big stakes, it's easier to negotiate with counterparties on the other side of the table, and also then impose your will. On smaller players. So if you think about what I think are the two most important players in the distressed debt world, those are, in my view, Elliott and Appaloosa, both of whom were key players in Caesars, although in different parts of the capitalist Russia, what they, both those firms do is they take massive positions in particular securities, and then they develop a very strong point of view, and they have a lot of conviction. And when those two firms take a position, everybody knows that it's going to be very difficult, if not painful, if they're going to Actually fight with those guys. So size, I think definitely does matter. And I think the time since these years, more and more of these handful of firms are dominating the space and they're dominating because they have bigger and bigger funds and they're taking bigger and bigger positions. But the wild card is when you …

AI assessment note: “So size, I think definitely does matter.”

Q So clearly we're going into the financial crisis and maybe it didn't turn out the way they'd hoped. What did the capital structure look like? So you had the six billion tranche of equity. There's 24 of debt. What were the layers of debt?

A Yeah. There is two basic components of the capital structure. So if there's twenty four billion dollars of debt, there's one vehicle which we'll call the Caesars or Harrah's Opco, where most of the casinos are, and that would raise eighteen billion dollars of traditional bank loans and then high yield bonds. And there was also some pre LBO Harrah's debt, which the covenants and the documents didn't call for it to be repaid. So all those bonds were unsecured. They were investment grade bonds, so they were relatively low risk at the time. Since those didn't get refinanced, they were pushed to the bottom of the pile. So they went from very safe investment grade bonds to at the bottom of an eighteen billion dollar capital structure in the so-called Harizopco. And then there was this separate prop co-financing, which at the time was described as a CMBS structure. It was ultimately not quite securitized. It was essentially a mortgage. And so, rather than being financed by traditional cash flows, like in the Opco, where leverage is measured as a multiple of EBITDA, so it's whatever, six, seven, eight times EBITDA, Propco was based on a loan-to-value metric, and so that allowed for even more leverage. In fact, it was, as we recall, the debt markets were very hot in 2006, so you could put a massive amount of leverage. As we talk about in the book, there's this fourteen-month gap between…

AI assessment note: “There is two basic components of the capital structure. So if there's twenty four billion dollars”

Q How do the rules work in such a way that you've got a parent guarantee supporting, call it, twenty-four billion of debt, and you can issue a less than two billion dollar tranche that wipes out that entire guarantee?

A The release of the guarantee is not just from the financing. There was a couple of things that happened. As a part of the financing of the piece seven, The company Caesars also sold stock in the Opco. So the Opco is a hundred percent where the casinos are is a hundred percent wholly owned subsidiary of the parent. And so The guarantee can go away according to the indentures through three different conditions. One of those conditions is if the OPCO is no longer a wholly owned subsidiary. So if they sell five percent or some portion of the OPCO stock to third parties, the guarantee goes away. And so that is how the guarantee is ultimately released. There's this transaction to sell a portion of the stock to a set of hedge funds. But the problem with that transaction is obvious, right? The Opco itself is deeply insolvent at this point. There is no equity value. The debt is all distressed, so therefore there's no equity value. And so this transaction to sell equity, whose purpose is to release this guarantee, it feels like a sham to the creditors. And in fact, the hedge funds that bought the stock in Opco were all hedge funds who had debt positions, who were benefiting for the release of that guarantee. And then if you look at the analysis from the investment bankers at Blackstone, which is the firm representing the Caesar's parent, they were saying there's no kind of traditional va…

AI assessment note: “The guarantee can go away according to the indentures through three different conditions.”

Q So the business isn't doing well and you have Apollo and TPG who own the equity and obviously have a set of incentives to keep things going. So what happened from there in between, I guess, that point in time and ultimately there's a bankruptcy proceeding a couple of years later?

A Yeah. So the deal closes in January of 2008, 14 months after being announced in late 2006. And so what's interesting about the 2009, 2010 era is Obviously the economy has collapsed. Vegas is not immune from the great recession. The convention business, which had been relatively stable, obviously collapses with the collapse of wall street. Atlantic city is under siege. And so the business falls apart, but simultaneous with that, uh, we all remember this was there was a massive amount of liquidity injected into the economy by the federal reserve. Interest rates go basically to zero. And so there's all this money. Out there to refinance debt if you want to, and we have the core businesses in bad shape. There's this incredible firefighting effort from Apollo and TPG. And Apollo is a master of capital markets in these kinds of transactions. And so there's the usual debt exchanges, exchanging debt for a discount, refinancing debt, issuing new debt, pushing out maturities, all the stuff to just keep the option alive, kick the can down the road and hope for an operational turnaround. And so they do this in 2009, 2010, 2011, very kind of traditional so-called liability management transactions. But then there is this very fateful question, and this is something that confronts all sorts of private equity firms at the time is, do we actually want to put in, we, the private equity firm, put…

AI assessment note: “exchanging debt for a discount, refinancing debt, issuing new debt, pushing out maturities”

Q So Sajid, take me back now. We've got this bankruptcy filed. There's a bunch of different people around the table. We got Apollo and TPG. We've got the term loan holders, GSO. We've got Elliott in the first liens. We've got Oaktree in the second liens. What happens from here in the twists and turns of this case?

A What's fun about this world, and I think why we've written this book or why we think it deserves a book is, uh, as you pointed out, Ted, there's all these diverse players and This complicated multi-party negotiation, and they're all playing their own chess match with each other, and they're allies one minute, adversaries the other, and you never know when a party's going to flip. And so the way to think about the seizures case is there's these two competing forces. The typical Chapter XI restructuring is about reorganizing the company as quickly as possible, reducing debt, and minimizing the stay in bankruptcy so you can Get out of bankruptcy and just shed debt and avoid all the high costs of lawyers, which long drawn out cases often are about. And so there's this effort by Apollo, who obviously is the junior claim holder in the Caesars capital structure being the equity holder. They are junior, but they control the situation because it's their company. They own it, and so they try to exploit that advantage by trying to come up with a plan to restructure the company, sign up as many creditors as they can. They go into bankruptcy with this deal with Elliott. They very quickly get a deal with the GSO group, and that is supposed to create all kinds of pressure on the most junior debt holder, which is the Oak Tree Appaloosa second lead bondholders. So even if Apollo is most junior,…

AI assessment note: “They go into bankruptcy with this deal with Elliott. They very quickly get a deal”

Q and you can think about that now where there's no covenants. And then there's this question of what's the right thing to do? Etiquette. If you're playing tennis with someone and there's a ball on the court, you pick it up. It seems like some of these players just play by different rules. How does that play out less so much necessarily in Caesars, but broadly in the distressed business?

A Yeah. So one thing that I think is an interesting change is And the norms and conventions of this role is that we'll just start with the most basic one. There was a time if you were a private equity firm and your investment went south and was in trouble and your equity was worthless and it wasn't close to having a chance to ever be recovered, you would just very kindly, very politely, just hand over the keys to the creditors and tell them, good luck to you. We wish you well. And you would tell your own LPs that this is a risk of private equity. We invest a dollar, we can lose a dollar, but the reality is often we're going to turn one dollar into two dollars or three dollars into four dollars. And so if we do that enough times, it doesn't matter if every so often we lose one dollar on a one dollar investment. Now the attitude is that these documents over the last decade plus are very loose. They give us all this flexibility to keep kicking the can so we can keep doing various liability management transactions to keep the option alive and we don't have to mark down the investment and We can hope that we strike gold or there's a lightning strike down the road, and on occasion that happens. But that has also led to an erosion that you say of the kind of norms of what you could and should do with counterparties, in this case creditors. And creditors now have made their own debt. The…

AI assessment note: “that has also led to an erosion that you say of the kind of norms”

Q Here's one for both of you and Sajid, why don't you take it first? Which two people have had the biggest impact on your professional life?

A So I'll start with my dad and that's a little bit of a cliche answer, but I'll explain actually what I mean by that. I had a career in finance before I became a journalist. I had this, like, deep love of reading and curiosity about the world and actually just the news. And I think I get that from my dad because he himself was an avid news reader. We had all sorts of newspapers and weekly magazines in our house, and I guess I became this kind of news junkie. And so I had this job now where I'm doing what I would be doing even if I wasn't in this profession, which is reading the news and picking up every scrap of information I can. And now that's my job to do that. I read a lot. I talk to interesting people. And I write a little bit. What could be better as a career? The second person I would name is a vice president I worked with when I was an analyst in investment banking at Merrill Lynch, which was my first job out of college. And this person was really, really smart and showed me that a job just couldn't be just a job that you could find a way to pursue intellectual curiosity and just constantly be learning. And I think Many people will view a job as just something like a series of tasks rather than something to, to be passionate about. And so that, uh, and it's only, I think inspired me to do a job where I am doing what I love to do. It's something I can be excited about.

AI assessment note: “So I'll start with my dad... The second person I would name is a vice president”

Q To set the stage, and I'm really excited to walk through this story. Sajid, you mentioned you came out of grad school in oh six and went to banking. So a lot of this starts in this pre-crisis. Why don't you start walking through what the Caesars business and capital structure looked like before the financial crisis? Sure.

A So a big part of our story is where did this business, which was formerly known as Harrah's come from, and why would these two private equity firms ultimately express interest and buy this company for roughly thirty billion dollars? And so Harrah's had been this sleepy regional chain founded by a guy named Bill Harrah, who started as a bingo hall in Reno in the 19 thirties. And by the 19 nineties, early nineties, it was part of kind of a conglomerate of hospitality businesses and was mostly, uh, And also ran. And at the time, companies that were coming up in Las Vegas and in gaming generally were built by guys like Steve Wynn and Kirk Corian, who are these master PT Barnum types, who had created casinos around and resorts around explosions and volcanoes, and Harrah's didn't have a trick like that. But by chance, there was this guy named Gary Loveman, who Had been a PhD student at MIT in the late eighties and then became a junior professor at Harvard. He had early in his career ideas around customer loyalty and ways businesses could build loyalty amongst customer base, particularly in competitive fields. And so he started doing these executive education classes that was then the Harris company just caught the eye of the CEO at the time. And to make a long story short, he was given a chance to be an executive straight out of never having an office job, just be a professor at Harv…

AI assessment note: “where did this business, which was formerly known as Harrah's come from”