\n(Bloomberg) \u2014 Caesars Entertainment Inc. is using its namesake\u2019s 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.<\/p>\n
\tIn 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.<\/p>\n
\t\u201cThey will use their cash or whatever devices they can,\u201d Erik Gordon, a professor at the University of Michigan\u2019s Stephen M. Ross School of Business, said in a telephone interview. \u201cThey spent probably to the exact dollar just what they needed to get 51 percent.\u201d<\/p>\n
\tCaesars\u2019 strategy for dealing with its main operating unit\u2019s 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\u2019s Entertainment Inc. private for $30.7 billion. The consequence of this approach for the junior bondholders excluded from last week\u2019s deal is that they will be left out in the cold, according to money manager Mark Heiman of Saguaro Capital Advisors LLC.<\/p>\n
\t\u2018Most Egregious\u2019<\/p>\n
\t\u201cThat is one of the most egregious things they\u2019ve done so far, even though it\u2019s a relatively small amount of capital,\u201d said Heiman, a former analyst at short seller Jim Chanos\u2019s Kynikos Associates LP whose current company owns some of the unsecured notes. \u201cThere isn\u2019t one class of bonds that isn\u2019t outraged about something,\u201d he said by telephone from Scottsdale, Arizona.<\/p>\n
\tSome unsecured bondholders who weren\u2019t party to the deal said last week they sent Caesars and the bonds\u2019 trustee a letter Aug. 14 arguing that the agreement gave preferential treatment to certain bondholders, the O\u2019Brien 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\u2019Brien group pursuing \u201call of our legal and equitable rights and remedies,\u201d according to the letter.<\/p>\n
\tSecond-Lien Litigation<\/p>\n
\tCaesars is already engaged in litigation with holders of some of its approximately $5.2 billion of second-lien secured bonds over the company\u2019s transfer of casinos to an affiliate and the removal of the parent company\u2019s guarantee on the operating unit\u2019s debt.<\/p>\n
\tGary 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\u2019t immediately respond to an e-mail seeking comment.<\/p>\n
\tCash 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.<\/p>\n
\tFree cash is money available for reinvestment in the business, rewarding shareholders with dividends and stock buybacks, and to retire debt.<\/p>\n
\tDebt 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.<\/p>\n
\t\u2018The Dust\u2019<\/p>\n
\tNegotiations 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\u2019s three major bond types, that leaves holders of the second-lien securities as the last class as yet unaddressed.<\/p>\n
\tJulius 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\u2019s troops from attacks by reinforcements.<\/p>\n
\t\u201cThere\u2019s going to be a divide-and-conquer strategy, just like they did with this unsecured deal,\u201d Heiman said. \u201cEveryone who didn\u2019t do it is left in the dust.\u201d<\/p>\n
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