High-Profile Chapter 11s | The Acquirer's Multiple®

In their recent episode of The Acquirers Podcast with Tobias, Max Frumes and Sujeet Indap, co-authors of The Caesars Palace Coup discussed High-Profile Chapter 11s. Here’s an excerpt from the interview:

Tobias: Let’s talk a little bit about high-profile Chapter 11s. What are these Neiman, Toys“R”Us, PG&E and Hertz, what do they tell us about this particular case?

Max: Yeah. What we like to say is that all of the factors that created the modern-day Chapter 11 process and all the interesting innovations… will fly by the Caesars case and then every subsequent bankruptcy, also they can be referenced in some way, shape or form to the Caesars case. Modern-day Chapter 11 was born out of the rewriting of the bankruptcy code in 1978, which essentially allowed for different creditor classes. Before there was maybe just a couple of different banks, they were all just assumed to have one idea, they get some sort of recovery and there wasn’t as much representation between, let’s say, for a second lien unsecured that might have different priorities.

Once that happened, and along with the proliferation of junk bonds, it created this just enormous capital structures at companies that would then need to file– they would need to restructure, and the Chapter 11 process in the US became the model for the world. That created a very sophisticated type of distressed debt investor that really found a major foothold after the great financial crisis as well, major fortunes were made from that, because the understanding of investing in undervalued securities, that’s where David Tepper made a lot of his money.

By the time this case was taking place, it was a very, very competitive industry where a lot of people had made a lot of money, and you would have– if there was a real good opportunity to get involved with a good company that had a bad balance sheet, then there would be a pretty vicious fight over who got control of it, who would be able to make a disproportionate amount of money.

For around this time, major bankruptcies that happened, that were the result of the top of the buyout, like, the 2006, 2007 buyout boom, that era. Included TXU, you got to United Caesars, there’s five or six other examples of companies that had $20, $30 billion buyouts that eventually filed for bankruptcy, and those all happened within a couple of years of each other.

Then after Caesars, you had cases like J.Crew, and Neiman Marcus, where in a similar fashion, there was what we call the stripping of assets from creditors. Because of these loopholes in the creditor agreements and the indentures that govern the bonds and the loans of these companies, the private equity sponsor can, through how loose they are, move assets that should have actually provided credit support to those creditors away from them, and then give them some sort of negotiating leverage in a bankruptcy or restructuring situation. We’ve seen a lot of those bankruptcies post Caesars, or even out-of-court restructurings. We see that and then we also see a lot of the players from Caesars doing similar things in near bankruptcies nowadays.

A recent one, I can think of is– Acosta was this company, that Oaktree and Elliott, they wound up buying the debt and completely yet equitizing it, owning the company and then merge debt free. We see a lot of the culmination of everything prior to Caesars showing up in Caesars and then everything subsequently as people learned some lessons to then apply in these subsequent Chapter 11s.