"What's in a name?..."
- William Shakespeare
Investors in the common shares of Caesars (NASDAQ:CZR) have had much guidance from analysts and observers, including myself, as to the actionable possibilities during its current related bankruptcy woes. This article now explores the potential in Caesars bonds, including those that have tanked or defaulted in the bankruptcy process. As an analogous situation, not pure apples to apples, but nonetheless potentially applicable, I herewith present a narrative of the bankruptcy of Donald Trump's Atlantic City Taj Mahal and show how, in reasonably comparable circumstances, much money was made on the distressed bonds. At the end of the article, I draw a rationale for investors in Caesars bonds right now that seems to me to present intriguing possibilities for profit as management and the junior bondholders are closeted in mediation. And of course, before any restructured financial deal emerges.
In 1990, I was recruited by the glitzy new Trump Taj Mahal Atlantic City casino as senior vice president of Marketing. I was part of a new top management team brought in by Donald Trump to help fix the mess created by the high debt financing of the $1.2 billion casino hotel and further exacerbated by the blunders of his original management team.
Rumors were gaining steam around Wall Street that the property was so overleveraged that even if we produced record daily win numbers, we were still headed straight to the bankruptcy court. Opinions abounded that bondholders couldn't wait to toss Donald under the bus faster than you can now say "Ladies and gentlemen, the president of the United States." That was August, and by less than a year later, the pressure cooker of Donald's overstretched total leverage was near explosion, threatening any possibility of his holding on to any equity in the Taj property.
We filed for a repackaged bankruptcy. By losing control, Donald would not only tank his equity, but also lose the various fees he was collecting at the corporate level on his three AC casinos. Trump Plaza at center boardwalk was doing fine, but the Taj and later his Trump Castle were facing grim futures unless their finances were restructured.
After a few days on the job Donald called to welcome me.
"Just get those slots firing and don't worry, Howard," Donald said resolutely. "We're the greatest property in this town, We're fabulous. I built the best building in town and they'll recognize it," he enthused. When I told him that I would give it my best shot, he confidently replied with a "We are great, we'll be greater." He wished me luck and promptly hung up.
In those hectic days, he was constantly huddling with his very crafty corporate CFO, Stephen Bollenbach, the guy who ultimately fashioned the restructuring that saved the day. (Bollenbach subsequently served as chairman of Hilton Hotels (NYSE:HLT), and ironically, in 1996, as part of the Park Place Entertainment division (Bally's, Harrah's and later Caesars), where became chairman of in 1998. His mastery of restructuring was widely credited with saving the Trump empire for bigger and better things.
The plan of attack
The Taj wasn't public yet, but its bonds were publicly traded, and the note holders who had gleefully lined up to buy the bonds to finance most of the construction costs were screaming foul all over the place. Their mantra: "Bye bye Donald, hand over the keys."
Bollenbach's strategy was to secure agreement by the bondholders to a prepackaged bankruptcy plan that preserved the majority equity for Donald. Not a lay-up at that time, given the hostile noises coming out of Wall Street.
A team of bankers was recruited and then joined by Bollenbach and his corporate minions to help craft a rescue plan that could be sold to the note holders. I was one of four property-level senior managers to present the plan to the Street. Our group included the CEO of Trump's three AC properties, Ed Tracy, (recently retired CEO of Sands China), the CEO of the Taj, AC Resorts International pioneer Jack Davis, and our CFO, Henry Hornbostel, a top former Golden Nugget financial executive from the Steve Wynn tree.
We were to present our numbers and our strategy to the bondholders steering committee advised by the distressed securities guru Wilbur Ross. We were each to be given 10-15 minutes to present our part of the case, making certain we stuck to the facts and reiterated the theme that the biggest asset we had going for us beside the building itself and new executive team was the Trump name on the door.
It was a time back then, as it is now, for entirely different reasons of course, that the Trump name had huge media value. From the business pages of The Wall Street Journal and The New York Times to the tabloid front pages of the New York Post and almost daily "Donald" coverage on national television talk shows, we'd reaped millions of dollars worth of free publicity associated with Trump's celebrity.
It was the single asset on the balance sheet without a number, but very possibly under the dire circumstances, bearing the greatest weight in the minds of fence-sitting note holders. That was what we were tasked to prove.
The bondholders had arrived unimpressed, we were told, clamoring for the keys to the Taj Mahal Atlantic City casino as they watched each day's trading in the bonds go lower. I recall prices sank to the low $50s or a bit below. We'd have to convince them we could mine superior revenue flows from the property going forward if we continued to be known as the Trump Taj Mahal casino versus the plain old Taj Mahal casino, minimizing what they could expect to recover in liquidation. They had to be convinced that our runway to profitability was paved with Trump gold.
On presentation day at the property, the meeting room was packed with surly bankers, analysts and representatives of the bondholder steering committee. We each delivered terse, believable sets of numbers and programs to the group, my own part being how the Trump brand translated into a highly marketable motivation for gamblers and tourists. I said we could bring our market share up to citywide snuff or better on a win per gaming position per day. Without it, we were just another big building with flashing lights, crazy colors and polystyrene minarets. Clearly, in a meeting room full of people watching their bonds swan-dive by the day, we faced an audience of hardened skeptics.
There was no shortage of tough, penetrating questions. We each took our turn at the podium, presented our plans in slides, did deep-dive analysis of city-wide gaming numbers and repeated the central motif: With Donald's name, the place was a winner. Without it, it might just as well be the neighborhood bowling alley.
The room was tense, the presentations went off well, we thought, and the Q&A, as we had expected, was tough and pointed, with lots of rebuttals to our numbers. When we were done, the room went dead silent. Bondholders sat there scribbling their notes, rubbing their chins, chit chatting in a low murmur among themselves.
Then, Donald entered the room, sweeping in as he still does on the campaign trail today, big smile, blond hair swept back to the nape, dressed in his de riguer dark blue suit, white shirt, red silk tie and a lot thinner than you see him now. He waved to the group and took a seat beside us as the first team investment bank guy took to the podium. The aura of celebrity surrounded him, and all eyes were glued to Donald as the banker made his presentation.
To the best of my recollection, here's the whispers we exchanged as the final specifics of the restructuring deal were laid out:
Donald: (whispering) How's it going so far?
Me: I think pretty well. (I nodded out at the group, which was firing really tough questions, still skeptical, but a bit more mollified.) They'll either get it or they won't.
Donald: Naw, don't worry about all the talk. Look, one thing means the whole deal: they need my name on the door. That's it, they know it, we know it, the world knows it.
Now, 35 years later, one may suppose Donald Trump's campaign message hasn't changed. He believes the nation needs his name on the White House door. I leave that assumption to the pompous pundits of politics to ponder. Not my patch. But realistically, the Trump name went a long way that day to lend conviction to the restructuring plan.
One deal wherein the end the medium was the message
At the outset of the negotiations between Donald and his corporate guys, the bankers and bondholder steering committee, he was pushing hard to hold controlling equity in a debt-for-equity swap. At first, he would not budge. Even cornered, Donald was a tough negotiator. By the pure numbers at the time, it appeared something of a stretch to believe we could generate the cash flows to operate the place, market it aggressively behind the Trump brand, and still have enough cash left over to make reduced interest payments in a timely manner until better days arrived.
Friends on the Street were calling me, expressing a cynical view of Donald and his predictions. "The Street doesn't believe in Donald anymore. He's disappointed them one too many times," one analyst from a major investment house told me the next morning. "He's probably going to go down. Wilber Ross and his steering committee guys are barracudas. They smell blood here."
I disagreed, telling him we had a great casino property, and with a lightened debt burden we'd make it work.
After a tortured negotiation, the deal was finally struck. And to no one's surprise, it turned out to be a win-win. Donald ultimately held on to control of the equity, and the bondholders who held on, in time, made a great score.
Here was the deal that ultimately won court approval in record time, just six weeks after the original filing:
- The underlying assumption of the deal was that bondholders sitting on $675 million in Taj notes would fare lots worse in a liquidation. An analysis prepared by our side indicated that, at best, note holders could receive $396 million in a net liquidation, or 43.4% of their money. However, our results were already improving early in 1991 by a cut of $2 million in losses by Q2. We were heading rapidly towards a turn to profitability despite a lag in city-wide revenues in the aftermath of the Gulf War and other macro factors.
- We estimated that earnings before interest and depreciation would reach $95 million in 1991, compared to $104 million originally forecast before the lapse in citywide visitation. Close, and getting closer, to where we had to be.
- Our estimates were that our debt service under the reduced interest deal would total $70 million, leaving a good cushion against unexpected market downturns. Wilbur Ross, representing the bondholder steering committee, supported that number.
- The deal would award 49% of the property equity to the bondholders, with Trump retaining 49%, and the remaining 2% in effect would be escrowed. That equity would be returned to Trump when certain earnings criteria were reached - thus, in the end, returning control to the Trump Organization.
- Wilbur Ross, advising the bondholder steering committee, echoed support for the equity swap/reduced interest plan when it came before the Federal Bankruptcy court overseeing the case. Ross told the court, "I think it (a liquidation) would be a disaster. It would have tragic consequences for secured creditors and probably end up wiping out unsecured creditors. People are not going to gamble at some place if they are afraid it can't pay its bills or its players."
The criteria was achieved, and Trump got back control.
(After our deal was completed, Trump faced similar fate over his Trump Castle property at the AC Marina. It, too, was finally resolved in similar fashion.)
In the end, we were told, bondholders bought into Ross's recommendation and so did the Federal Judge. The timing was fortuitous - she approved the deal on August 29, 1991, just in time for the big Labor Day weekend. And we had a strong weekend, meeting our forecasts, and for some revenue streams, beating it.
Subsequently, the property went on to generate hefty operating improvements until Trump got his 2% and won back control of the property. Later, he brought it and other of its AC interests public.
He'd dodged the bullet for the moment. And later took his casinos public, which had a less happy ending.
Subsequently over time, as the AC market began deteriorating in 2007, the property faced more bankruptcies - finally ending up last year in the hands of Carl Icahn, who injected $100 million into the Taj Mahal Atlantic City casino. He is now engaged in battling the unions for concessions, threatening that if he doesn't get them, he'll take a walk.
What is most telling is that the Taj bonds kept going up, after the deal went into place. And playing undertaker, for many investors, turned out to be one happy reward for their patience.
Long before any final deal with the bondholders was in sight, my immediate boss, Jack Davis, an AC pioneer with Resorts International and one of the savviest investors I've ever had the privilege of knowing, bought the Taj bonds in the high $40s and low $50s. He urged me to do the same. He was remarkably prescient.
"The market wants to believe in Donald. If they believe in the name, they'll often believe the numbers. Icahn's not selling."
I followed Jack's advice and remain eternally grateful for the nice profit I turned on my investment when the bonds recovered handsomely. Better yet was the insight that revealed there's lots more to valuing bonds than market prices or in the behavior of credit default swaps.
When the underlying asset was a good casino building in a stable market (at that time) with a reasonably predictable cash flow capacity, such securities can tend to be bargains if they have kickers for debt conversion or other covenants that express some confidence in the debtor's ability to meet reduced interest costs.
My understanding was that many bondholders who did believe, hung in and made great money.
Here are some signals on the current Caesars mediation to watch for a move on the bonds:
I see some curious analogies in the Trump bankruptcy with the current woes of Caesars currently in the throes of mediation with its hostile group of junior note holders. Credit default swaps have already been redeemed based on 15.9% on the dollar and owners will collect about $1.1 billion. This wasn't a factor back in 1991 but the rise in the defaulted bonds could be.
What is similar in terms of opportunities for investors willing to risk a buy in now is:
- The mediation is most likely to produce a settlement which virtually assures, unless the juniors really dig in their heels, that some kind of debt-to-equity swap and/or interest rate reduction will be agreed upon.
- That there will be coupon relief for some of the tranches which hold up to 10% coupons. Assuming those rates can be cut by mutual agreement, the Caesars properties can achieve stronger operating results and, by extension, move the bonds higher over time. Caesars properties continue to flow cash at a rate that can sustain a reduced total debt service number.
- Naturally, in the Taj case, there was no court-ordered Davis Report, which has come down hard on Caesars and Apollo Global Management's financial engineering sleight of hand. However, in our view, this strengthens, not weakens, the case to be made for taking a good hard look at Caesars underwater bonds at this time. We think today's Caesars junior note holders will agree - as the Taj holders back then could - that in liquidation, their recovery would be far less than it would be if they held lower coupon bonds or bonds converted to equity.
- Current Las Vegas trends appear positive. US regional casinos, while setting no houses on fire, are sustaining either flat or slightly rising revenue streams. Caesars properties in those markets could contribute to earnings that could help finance lower debt service.
- The iconic value of brands. At Trump, we benefited from the aura of celebrity - which, at the time, had considerable resonance and played a role in our rescue plan. In the case of Caesars, there is no celebrity, but there are three brand names which, in themselves, to the markets they serve, are well established. Of these, Caesars is the most powerful as a global brand, Harrah's is a 60-plus year solid performer in the mid-range of the market, and Horseshoe, which is least valuable, still maintains good visibility in its markets.
As we have sussed out possibilities of the Caesars situation in previous SA articles, we also believe investors would be well advised to begin sniffing around the bonds now, before any texture or shape of a possible mediated agreement takes place. In particular, the Harrah's 10% notes, showing at $60 on Morningstar as of this writing, seem interesting to us.
The Caesars negotiations could be long and arduous, and provides some time for bond investors willing to take on some risk to buy in. While the Taj case described here is not presented as a perfect apples-to-apples analogy, it bears some of the telltales of the Caesars saga that lean on the core idea that financially restructured casino properties may have a lot more ongoing cash flow value for debt holders than many other kinds of distressed securities.
About the author: Howard Jay Klein is a veteran c-level casino executive and consultant. He is the publisher of The House Edge premium site on Seeking Alpha. He is the author of Mastering the Art of Casino Management and other books in the field. His own gaming portfolio is sited in a blind trust for his children and grandchildren so as to avoid potential conflicts of interest with gaming clients.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.