The Looting of Caesars (And How You Can Profit)

Today, I have a somewhat unusual recommendation for you.

It springs directly from the private equity fiasco I’ve written about before – but it’s not a short. It’s actually a long play that will take some time to mature.

But I expect it to pay off big-time….if you’re patient.

In order to understand this play, you have to understand the looting of Caesars Entertainment Corp. (NASDAQ:CZR) by its private equity sponsors Apollo Global Management, LLC (NYSE:APO) and TPG Capital (formerly Texas Pacific Group). I’ve been following this sorry tale for quite a while in my Credit Strategist newsletter, and I’ve decided I don’t want Sure Money readers to miss out, either.

Here’s the story….and the recommendation.

In a jaw-dropping series of maneuvers to steal billions of dollars of assets for themselves, APO and TPG engaged in a deliberate scheme to move assets out of the reach of creditors while Caesars’ business deteriorated under the weight of $30 billion of debt borrowed to take it private in 2008. This scheme forced the value of the company’s subordinated debt to drop by more than 80% and triggered a series of nasty lawsuits against Caesars, APO and TPG by some of the country’s most formidable investors including David Tepper and Paul Singer.

It now appears that justice may be done. In a long-awaited March 15 report, Bankruptcy Examiner Richard J. Davis, who was appointed by the court hearing Caesars’ bankruptcy case, found that the creditors had strong claims against APO and TPG of between $3.6 and $5.1 billion. Mr. Davis also found that Caesars was insolvent as long ago as 2009, which demonstrates just what a disaster this deal was. When a company becomes insolvent, the fiduciary duty of management and directors shifts from the stockholders to the creditors.

But instead of acting like fiduciaries, APO and TPG acted like thugs. Rather than take steps to deleverage the company through debt-for-equity exchanges or negotiate responsible debt reduction with creditors, these two firms (which manage money for some of the largest institutions in the world) started violating both the spirit and the letter of Caesars’ debt obligations by shifting assets out of the hands of creditors. They tried to disguise their efforts with the assistance of willing attorneys, accountants and investment bankers, all of whom checked their ethics at the door of Caesars Palace, but they were fooling nobody. While Mr. Davis did not find evidence of civil or criminal fraud (a point on which I strongly disagree), he made it clear that the private equity firms should settle this matter before it goes any further.

Heeding Mr. Davis’s advice, Caesars announced that it would work to settle this matter expeditiously and increase its initial offer to contribute $1.5 billion to the bankruptcy reorganization. The money will come from APO and TPG, of course. The question now is how much money APO and TPG will have to kick in to avoid what would without question be an ugly day in court.

This mess has already severely damaged the reputations of APO and TPG. Since peaking at $35.72 per share in early 2014, APO’s stock has lost more than half its value and is currently trading at $16 per share. TPG has debated going public for years but has been unable to pull the trigger. The stock prices of all publicly trades private equity firms have declined sharply since 2014, but these firms appear to have been particularly hurt by their disgraceful conduct at Caesars.

apollo stocks

Sadly, this is not the only situation in which APO and TPG have been accused of abusing the people who lend them money for their LBOs. Both firms have a history of this type of behavior; Caesars is just the most appalling example.

Here’s Why Caesar’s Is Going Straight Up

But like everything in life, trouble brings opportunity. In this case, investors who play this situation correctly stand to make big profits.

Negotiations are ongoing to resolve this case and nobody is talking numbers, but based on my knowledge of the parties involved, it seems reasonable to expect that APO and TPG will ultimately pay something in the range of the $3.6 to $5.1 billion of damages that the Bankruptcy Examiner targeted in his report. They will likely do this through a combination of cash payments, forgiveness of Caesars debt that they own, and other consideration.

The settlement will determine the value of Caesars’ distressed debt at the time the company exits bankruptcy. The biggest and most widely traded piece of subordinated debt is the company’s 10% Second Lien Notes due 2018. These bonds dropped to as low as 10 cents on the dollar around the time that Caesars filed for bankruptcy in early 2015. At that time, I recommended that readers of The Credit Strategist buy this debt based on my belief that APO and TPG had committed serious breaches of the law and would be forced to make substantial payments to bondholders that would cause the bonds to rise in value. Since then, these bonds have rallied and recently traded in the mid-40s. But I still expect them to rise further. Let me explain why.

The company’s subordinated debt is likely to be exchanged for stock in a restructured Caesars. The exchange of the 10% Second Lien Notes alone will reduce the company’s interest payments by about $450 million a year. Other debt will also be exchanged for equity, further reducing the drain on the company’s resources of debt service.

And, freed of the burden of paying over $1 billion a year in interest as well as the pernicious influence of APO and TPG over the business, a deleveraged Caesars should prosper.

There is a long history of companies emerging from bankruptcy with deleveraged balance sheets whose stocks have skyrocketed in value. I believe that Caesars stock will do the same thing over the next few years. While the stock may initially drop in value due to the fact that a large number of new shares will be issued to creditors in exchange for their debt, a greater portion of the company’s value will be reflected in the stock rather than in the remaining debt. As the new unleveraged Caesars moves forward, the stock should rise significantly.

This means that the stock received by creditors should make a great investment in the years ahead. As one of the premier gaming companies in the world before private equity got its hands on it, Caesars owns trophy properties.

Further, a deleveraged Caesars will be able to reinvest in its business instead of paying all of its free cash flow in interest to creditors and in egregious fees to its private equity owners.

Over time, I expect Caesars stock to rise sharply as the company’s value is shifted from creditors to equity holders.

That means that if you buy and hold Caesars Entertainment Corp (NASDAQ: CZR) now – and if you’re patient – you should see a sizeable payday down the road. At under $7.00 per share, it is a cheap way to invest in one of the great gaming companies that can now finally move forward without the albatross of LBO debt.

Sincerely,

Michael-Lewitt_sig

Michael

21 Responses to “The Looting of Caesars (And How You Can Profit)”

  1. It looks like Caesar’s went down the same slippery slope with APO as did Apollo Education and the debacles of University of Phoenix educational ripoffs of those who couldn’t afford real universities but got sucked into the over-promised staggering debt handcuffs on the hush-hush. Another Apollo engineered financial rip-off. I agree with you Michael, that APO deserves a though criminal scubbing from top to bottom.

  2. Dear Mr. Lewitt, Look forward towards all your news letters and advice. I just wonder with many of the casinos running in the red is it possible that Caesars Casino would just close completely . and the stock would not go up at all?

  3. I go back just a couple of years and owning Charter Communications, Inc. (Paul Allen fame), stock. In 2010 it was at $3.00 a share. Now it is trading in the $150-170 range….go figure…. History repeating itself.

  4. William Kirkey

    To the attention of:

    All the top dogs of management at Money Morning:

    Q. How do you and they sleep at night?

    Oops, I forgot, you must have a conscience and a sense of right versus wrong as well as “Thou shall not screw thy neighbor” to enrich my wife and children and myself,of course.

    How and what do you think any possible future investors will revue this entire sad affair of liars and cheaters and out and out fraudsters. Us small potato investor’s, with blinders-of,f have come to our own conclusions: that this is but yet another dirty rotten fiasco, where our money was/will be- stolen and illegally used to pay down any legal and authorized court ordered fines in this $5.5 Billion dollar range. Do you think we are all a bunch of idiots waiting on the sidelines with our money just burning a hole in our pockets to throw at yet another scandal.

    Let me count the ways that the book of dirty tricks covering the manipulated insolvency of Ceasar’s by APO and TPG , as well as some of the same bags of dirty tricks that has seen the demise of thousands of other small and large cap companies and their investors. We have been hung up, drawn and quartered, roasted, and then dropped straight into the fire pit, and I might add, for myself personally, even after having conducted my own due diligence which completely appeared to be righteous and run by honest management teams; only to be let down, and personally losing close to $ 100K dollars, in just two separate deals- one which was POLR and the other more recent , which was SUNE . Of course we know there are untold risks involved in the investment world, but, out and out lying, stealing, defrauding, cheating small investors out of our retirement funds just makes us insane with anger. We not only have to live with the governments insane financial policies, but then to add thugs of the markets into the mix, only serves to throw us over the edge. Do you have any idea what kind of feelings arise in a man who has used a large portion of his families retirement nest egg in an attempt to make the last of our golden years a little easier on us?

    You rich guru’s and lying, cheating and stealing 1%ters and last, but by no means least culpable, the top managers of companies. Well they surround themselves with all the big rich and powerful lawyers to defend, mitigate and minimize their nefarious and totally fraudulent activities. All the while the small time investor’s have not the means left to take these criminals to trial and then off to jail to serve an appropriate sentence; not just let the judge issue a stern rebuff and a fine and then it’s back to business as usual.

    This last fraudulent case of mismanagement, cheating, lying, fraudulent financial activity involving: myself as an investor and millions of otherswith me, involved a big number one company in its field, in the USA, maker and installer of solar arrays etc with a Market Cap of $1.9 Billion dollars and with a net 2015 income of $2 Billion dollars. So I read the reports on SunEdison (SUNE) written by one of your top staffers, and I read what he and many other analists wrote of this company, do many hours of my own due dilligence to check out this company that has offices around the world and a reported huge Billions of dollars of net income. But what I could not truly find or check out was this companies indebtedness because it was hidden in layers of side companies that assisted in the great deceit, if not, they ram rodded it. So I weigh all the available pro’s and con’s and decide to invest, hoping to make up for a prior similar case involving yet another energy company. I decide to purchase shares is stages so that I might lower my total share buy-in value. Well what do you think happens to this company Polar Energy (POLR). one of the larger institutional investors with money, sues (POLR) for financial improprieties, and the stock goes belly up and I and many other investors lose their shirt. Just as an aside, that was the first of two large investments that cost me big time, and because I am a Canadian, every stock share that I buy in a US company adds another 0.35 to 0.47% to the price
    of any of my investments, so this )POLR) deal cost me and my wife and family another $ 40 K.

    Now where can I turn to for help. I cannot afford to pay for good legal representation and on the pro bono side, no lawyer in the US will touch a case that does not involve Millions, it’s not worth their time and effort.

    So in parting, I would like to thank all the fraudsters, cheaters, liars and out and out criminal management teams in the USA for opening up my eyes to how the big brave Americans treat their bretheren, like sh..t!

    William Kirkey

  5. wow what a nightmare don,t blame you for being so angry we are on our own when it comes to investing because not one person can be trusted and if they had the answers they would,nt be telling us they would be keeping all the money they make for themselves. its always a crap shoot and you never know what these so called money managers really have in mind

  6. The boundary between White collar crime and bad management needs some bright lines. Bankruptcy proceedings are sh-t fights where creditors always seek to claim fraud and criminal conduct by debtors and their managers and advisors while debtors and their managers seek to get absolved of all debts.

  7. Above reminds of the quip by Kennedy Gammage: ‘We go the movies to be entertained, not see rape, ransacking, pillage and looting. We can get all that in the stock market’. Seriously speaking, Lewitt’s analysis of the shenanigans going on and the dangers in the financial markets is commendable.. However, recommending Caesars seems somewhat at odds with his warnings about the perilous outlook. There is a big overhang of shares that will be dumped by disgruntled shareholders at any rally attempt and keep CZR suppressed for quite a while, so investors might have wait a long time for this one to pay off.

  8. The case for DB puts is a strong one, but I am not conversant in trading options. Is there a good book or tutorial on how to trade options that explains the process thoroughly enough for the individual investor with a brokerage account like Etrade to navigate options without making stupid mistakes?

  9. @ William, I am totally with you mate and sorry for your losses.
    I toke money out of my gold (miners) investment to put in the heavily pitched SUNE, CHMA and TRXC stocks by the MM punters. Guess what SUNE filled for BK and both CHMA and TRXC products didn’t make it through FDA approval. So far that is a 100% failure rate based on their ‘expert’ advice resulting in a 80% loss of my investments so far. My own miners are up 60% so you can imagine I feel pretty stupid now and could kick myself in the ass.
    The question now is are the so called ‘expert’s from MM really suck professionally and have no clue what they are talking about (at least not more as you and me) or are they deliberately talking people in these ‘best ever’ investments and stuffing there own pockets? I guess it’s a bit of both.

    Like my old man just to say ‘if it sounds to good to be true…it probably is.
    I understand your anger and he’ll yeah I am angry too. My future suddenly looks quite different as before I made this perfectly pitched investments.
    It seems to me our current society is littered with scruples scumbags who’s only morale is to enrich themselves at the cost of hard working tax payers. I am talking government, politicians, Central Banks and Bankers, multinationals and corporates and Wallstreet and his punters.
    My prediction is this whole house of cards comes tumbling down somewhere 2nd half this year (in that I agree with Mr. Lewitt) One can only hope that that will be the end of this fraudulent and corrupt systems that only enriches the elite and everybody else is grinding their teeth while forced to finance it through the tax system. Time for a revolution I would say.

    Well sir I hope you can recover and earn some of your money back.

    Keep strong and good luck (and thank god you live in Canada…some good miners there which I invested in)

    Br.
    Marcel

  10. William Kirkey, these guys look for possibly opportunities for you but you are required to do your own due diligence in assessing their recommendations. Some recommendations are very risky so you should not put all your money into it unless you are willing to risk losing a significant amount of it. I too got burned by SunEdison, but I chalked it up as a lesson that I will be careful of risky debt ridden companies in the future. Our cultures today wants to blame others rather than take responsibility for their own actions. Let us be men, stand up and admit our own mistakes and move on in the future without repeating our mistakes.

  11. […] A: No. The creditors that are owed billions of dollars want the company to continue as a going concern so they can be repaid. CZR owns some great properties in Vegas that are worth a fortune once it gets rid of its private equity owners and exchanges its bonds for equity. I have seen this type of thing many times before and am confident that CZR stock will rise significantly over time. […]

  12. […] A: No. The creditors that are owed billions of dollars want the company to continue as a going concern so they can be repaid. CZR owns some great properties in Vegas that are worth a fortune once it gets rid of its private equity owners and exchanges its bonds for equity. I have seen this type of thing many times before and am confident that CZR stock will rise significantly over time. […]

  13. Gregg Armstrong

    I would nail the criminals hides to the barn door by going for treble damages in the amount of $10.8 billion to $15.3 billion. Because the “criminal justice” system is a farce the only way to punish the criminals at APO and TPG is through treble damages though I’d be more satisfied seeing them all in Federal SuperMax prisons.

  14. Caesars (actually Harrahs) some how has had access to resources to remodel and upgrade
    over the past several years. There was a spend big money strategy but I don’t know why they spent big money or how they got access to the funds. They turned the old cockroach infested Imperial Palace into the Quad not the Linq. I would like to know what is going on with the employee
    retirement plan. It must have been sucked dry by now … total speculation. Gary Loveman is
    still flying around on the corporate jet in the background and the new CEO is from Hertz Rentacar…. aaaaaaaaa. Rentacar to Casino… ie. Gary is still running the show. Gary is/was
    a Harvard professor.
    Paradise Island Nassau is now part of the Total Rewards Players Club. Check out that
    deal. There had to have been money involved. 3 of Caesars casinos in Atlantic City are not
    doing too well. Caesars sold off all of its casinos in Ohio to Rock Gaming.. “Jack”. My call is
    Adelson(Venetian Palazzo) or MGM are just waiting to swoop in and snap up Caesars Palace the flagship resort, (there are about 40 resorts total in the USA and Canada) in a
    fire sale fiasco. Harrahs(Caesars) sometime back purchased Benny Binnions Horshoe in
    Downtown Las Vegas on Freemont St. They raided Binnions for the Horseshoe name and the world series of poker. (Harrars even raided classic Binnion pictures, I saw them hanging in the Rio Cage) Adelson is a greedy bastard and I am sure finagling a way to scoop up the WSOP in the January firesale of the company… this is… speculation on my part …just a
    scenario that could occur. Caesars has divided itself into several entities it seems …..
    Just some tidbits of speculation. Vegas in general has dropped a notch or two by class factor.
    Even the Wynn has no class anymore…..I think there is a shortage of High Rollers and gamers .
    It seems Vegas is now catering to the gangsta class of ugly tats and creep music. Descent people ,,, will stay away if things continue to play out the way they are.
    So in short …. I am not Bullish on Caesars or Vegas. Total rewards Caesars no longer gives out lanyards for the players cards …. you buy them in the gift shop for $5 … still free at Circus Circus.
    So if some new attractions launch to attract bigger crowds to Vegas…. Caesars my survive … otherwise … its goin down .

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