(Bloomberg) — Caesars Entertainment Inc. is using its namesake’s divide-and-conquer strategy to marginalize one class of bonds to the potential benefit of its private-equity owners as the casino company hurtles toward a restructuring.

In agreeing last week to pay some holders of its most- junior bonds $155.4 million in return for them giving up certain protections, Las Vegas-based Caesars gets their support in a restructuring. That might make it easier for the company to force all classes of creditors to accept whatever agreement it reaches with senior bondholders.

“They will use their cash or whatever devices they can,” Erik Gordon, a professor at the University of Michigan’s Stephen M. Ross School of Business, said in a telephone interview. “They spent probably to the exact dollar just what they needed to get 51 percent.”

Caesars’ strategy for dealing with its main operating unit’s almost $19.8 billion in debt is becoming clearer in the six years since Apollo Global Management LLC and TPG Capital took the casino operator then known as Harrah’s Entertainment Inc. private for $30.7 billion. The consequence of this approach for the junior bondholders excluded from last week’s deal is that they will be left out in the cold, according to money manager Mark Heiman of Saguaro Capital Advisors LLC.

‘Most Egregious’

“That is one of the most egregious things they’ve done so far, even though it’s a relatively small amount of capital,” said Heiman, a former analyst at short seller Jim Chanos’s Kynikos Associates LP whose current company owns some of the unsecured notes. “There isn’t one class of bonds that isn’t outraged about something,” he said by telephone from Scottsdale, Arizona.

Some unsecured bondholders who weren’t party to the deal said last week they sent Caesars and the bonds’ trustee a letter Aug. 14 arguing that the agreement gave preferential treatment to certain bondholders, the O’Brien LLP lawyer representing some of them said last week. The letter demanded the company not go forward with the transaction and provide documents that were used to negotiate it. Failing to meet those demands would risk the O’Brien group pursuing “all of our legal and equitable rights and remedies,” according to the letter.

Second-Lien Litigation

Caesars is already engaged in litigation with holders of some of its approximately $5.2 billion of second-lien secured bonds over the company’s transfer of casinos to an affiliate and the removal of the parent company’s guarantee on the operating unit’s debt.

Gary Thompson, a spokesman at Caesars, and Owen Blicksilver, a spokesman for TPG at Owen Blicksilver Public Relations Inc., declined to comment. Fran McGill, a spokesman for Apollo at Rubenstein Associates Inc., didn’t immediately respond to an e-mail seeking comment.

Cash burn widened at Caesars Entertainment Operating Co. after it sold four top-performing casinos to an affiliate, according to filings with the U.S. Securities and Exchange Commission on Aug. 14, May 30 and May 2013. The unit experienced negative free cash flow of $477.8 million during the second quarter of this year, worse than $464.8 million burned during the year-earlier period, according to the filings.

Free cash is money available for reinvestment in the business, rewarding shareholders with dividends and stock buybacks, and to retire debt.

Debt grew even after the company received $1.8 billion in cash from the casino sales, according to calculations based on the Aug. 14 filing, the May 30 filing and a March 3 statement. Taking into account the retirement of debt due in 2015 using proceeds from a new $1.75 billion loan, the operating company owes $19.8 billion, compared with $19.6 billion on Dec. 31.

‘The Dust’

Negotiations to reduce debt are under way between Caesars and advisers to a group of top-ranked first-lien bondholders who seek to steer the restructuring, people familiar with the matter said this month. Of the operating unit’s three major bond types, that leaves holders of the second-lien securities as the last class as yet unaddressed.

Julius Caesar used a divide-and-conquer strategy to take over ancient Gaul, playing Celtic tribes against one another to increase his power. In a literal example of the concept, Romans laid siege to the fortress of Alesia in 52 BC, surrounding it with concentric walls. The innermost contained a Celtic force that had fled there after a battle, while the outer defenses protected Caesar’s troops from attacks by reinforcements.

“There’s going to be a divide-and-conquer strategy, just like they did with this unsecured deal,” Heiman said. “Everyone who didn’t do it is left in the dust.”

Replies:

No replies were posted for this topic.