Leon Black and Paul Singer got rich by outsmarting other people. For much of this year they’ve been trying to outsmart each other. Black’s Apollo Global Management (APO) and Singer’s Elliott Management battled over the fate of casino operator Caesars Entertainment (CZR), the company Apollo and TPG Capital acquired in a 2008 leveraged buyout. Caesars is burdened by lackluster properties and $25.5 billion of debt—some owned by Elliott—that came with the deal. Apollo wanted to preserve its ownership stake in Caesars, while Elliott was loath to accept less than it’s owed on its loans to Caesars. The showdown was “Godzilla vs. Godzilla,” says Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor.
On Dec. 19, Apollo signed a tentative pact with Elliott and other creditors. The parties had to overcome clashing agendas and an acrimonious history. So great was the ill will between Apollo and Elliott that when Apollo held a pivotal negotiating session at its office in Manhattan, it didn’t invite Elliott, people with knowledge of the matter say. Caught in the middle were scores of companies holding Caesars debt, including KKR, Oaktree Capital Management (OAK), and Pacific Investment Management Co.—plus about 68,000 Caesars employees wondering if they’d have jobs. Fran McGill, an Apollo spokesman, called the deal “a significant step in Caesars’ ongoing efforts to create a sustainable capital structure” and “ensure the best outcome for all stakeholders.” An Elliott spokesman declined to comment.
Last year, Apollo and TPG formed a new company, Caesars Growth Partners, and used it to buy some of the few profitable pieces of Caesars, according to an Aug. 4 legal complaint by a group of creditors. They said Caesars sold three Las Vegas casinos and Harrah’s New Orleans for less than they were worth, leaving the creditors with what they called “toxic” casinos throughout the U.S. and a laundry in North Las Vegas that washed the Las Vegas casinos’ sheets.
Amount of Caesars debt that will be restructured if the newly struck deal is approved
Apollo and TPG didn’t buy the laundry because they had at first thought it might really be toxic—as in contaminated with poison. The facility, on an industrial stretch of road with arid mountains in the distance that turn purple in the desert twilight, looks a bit like the Los Pollos Hermanos laundry in the TV show Breaking Bad. After Apollo and TPG determined there were no environmental problems at the laundry, Caesars Growth bought it, too. The laundry transaction is a “perfect metaphor” for the moves that enriched Apollo and its partners and made a Caesars default “inevitable,” the creditors said in the complaint.
Striking back, Caesars sued the creditors the next day, saying it sold the casinos—and the laundry—because the unit needed the cash, and it chose Caesars Growth as the buyer instead of auctioning them because that gave creditors a better deal. In the Aug. 5 lawsuit, Caesars singled out Elliott as having a “blatant conflict of interest” and “the greatest ulterior motive” in seeing that Caesars “defaults rather than survives and thrives.”
That’s because Elliott had bought credit-default swaps that would pay off when Caesars failed to make a debt payment, the complaint said. “Elliott’s scheme is all the more troubling” because the hedge fund sits on the International Swaps & Derivatives Association committee that determines if a company has defaulted, Caesars said in the suit. In court documents, Elliott said the allegation that it owned insurance against a Caesars default was a “red herring” and that it “defied logic” to imply that Elliott would try to destroy the value of its debt holdings to collect on the swaps.
Black is ingenious at finding ways for Apollo to come out ahead, often at the expense of creditors, according to allies and opponents—who are sometimes the same people, depending on the deal. Scott Kleinman, a partner in Apollo’s buyout unit, provided a glimpse of the company’s strategy at a Dec. 11 investor presentation in New York. Because of economic distress in 2008 and 2009, Apollo was able to buy $20 billion of the debt of its companies at a 50 percent discount, he said. That gave Apollo more say in how the spoils were divided in restructurings—in effect, it took the roles of both lender and borrower. “We will aggressively go out and protect our investments using all the tools available to us to be able to do so,” Kleinman said.
Singer is best known for leading the $25 billion hedge fund that bought Argentine bonds and then insisted the financially volatile country pay them in full. Elliott sued, and U.S. courts ruled in its favor. The Supreme Court decided not to take Argentina’s appeal, helping to trigger Argentina’s default, its second in 13 years. Argentine Economy Minister Axel Kicillof said he suspected Elliott of betting, with credit-default swaps, that Argentina would quit paying its debts. Argentina has yet to write Elliott a check.
Photographer: Yaacov Dagan/Alamy
Apollo, which manages $164 billion, can also play rough. In the case of another troubled company it owns, Momentive Performance Materials, creditors complained to a judge after Apollo gave them an ultimatum in bankruptcy court: They could either forgive about $200 million that they claimed Apollo owed them and get cash for the full value of their other debt holdings, or they would receive new debt from a restructured Momentive Performance worth less than their original investment. The judge backed Apollo, and the creditors who challenged the deal had to accept the less palatable alternative: new debt from Momentive Performance.
Such clashes are examples of why lenders who help Apollo finance corporate takeovers have begun asking for extra return on their money—a sweetener they call the “Apollo premium”—because of the likelihood Apollo deals will result in costly legal disputes, according to people with direct knowledge of the matter who asked that their names not be used. “When it comes to Apollo, this is how they operate,” says Janegail Orringer, senior vice president at AllianceBernstein (AB) in New York. Most buyout firms “don’t want to be perceived as having an adversarial relationship with bondholders. Whereas with Apollo, that’s kind of their modus operandi.”
As part of the latest agreement, Caesars agreed to put Caesars Entertainment Operating, its largest unit, into bankruptcy no earlier than Jan. 15 and no later than Jan. 20 and convert itself into a real estate investment trust, according to a statement released by Caesars. Holders of its $18.4 billion in debt—including Elliott—would get cash, securities, and equity in the new unit in exchange for reducing their claims on the company, and the parent company would provide as much as $1.45 billion in cash. The five firms that struck the agreement own 38 percent of the Caesars senior bonds. For Caesars to proceed into bankruptcy court, 60 percent of the bondholders must sign on by Jan. 5.
Some analysts say the agreement smooths the path for Caesars to begin moving toward profitability. Others say the company won’t get enough creditors to approve the deal, or if it does, will languish in bankruptcy court as creditors lob an endless series of objections. “That’s the amazing thing about it,” says Odell Lambroza, head of alternative investments and co-portfolio manager at Advent Capital Management. “If you put 20 managers and analysts in a room, you’re going to get 20 different opinions on Caesars.”