“Guys, we’ve got a $60 million gap to fill.”
The room murmured for a moment, then someone shouted, “Jim, it’s actually $130 million.”
“That’s a bad start. We just went backwards,” Jim Millstein sighed. This was about to get harder.
Millstein’s frustration could be forgiven. This meeting should have been wholly unnecessary. For a generation, Millstein had been one of the top advisors in the world of corporate bankruptcies, first as a lawyer and later as an investment banker. Just a few years earlier, he had served in the Obama administration as the inaugural Chief Restructuring Officer of the United States. But now, on September 23, 2016, Millstein was five years removed from his stint as a Washington insider. He had set up his own firm, Millstein & Co., to capitalize on his sterling reputation and experience. However, he had not fully appreciated just how nasty the restructuring world had become in his absence. After having the power of the US Treasury Department behind him for the better part of two years, he now found himself being mistreated by ex-Ivy League jocks almost half his age.
That morning, he was surrounded by a group of scowling hedge fund managers and their advisors in the offices of the Kirkland & Ellis law firm high atop New York City. Kirkland had a famously impressive set-up for such high-stakes meetings. Entire floors in the Citigroup Center in midtown Manhattan consisted of conference room after conference room, where white marble hallways lined by floor-to-ceiling wood panels gave way to larger open spaces and sprawling views of the city.
Millstein was trying to, once and for all, solve the restructuring of Caesars Entertainment, whose twists and turns had riveted Wall Street. The knock-down, drag-out affair was finally at its endgame. The fighting that had begun more than eight years ago after an ill-timed $28 billion leveraged buyout of the storied gaming company was mercifully being put to rest, along with Millstein’s nightmare. The brightest financial minds in the world just had to find an extra $130 million to bridge the gap between what was being offered and what was asked. These investors merely had to pledge back pennies on the dollar to clinch this deal.
“If everyone chips in, the bank debt and senior bonds are good to do the same,” Dave Miller said, speaking on behalf of himself and Ryan Mollett. Miller and Mollett—while only in their mid-thirties—had already established themselves as superstar distressed debt investors. Miller was with the feared hedge fund founded by Paul Singer, Elliott Management. Ryan Mollett worked at GSO, an affiliate of the juggernaut investment firm Blackstone. Collectively, the pair represented dozens of Caesars creditors holding $12 billion of Caesars debt. The two had been bitter adversaries early in the case but had long since made peace.
“Gavin, I need $6 million from your group,” Millstein demanded from Gavin Baeria, an executive at hedge fund Angelo Gordon, as politely as one can for such a sum.
Baeria, finding the spectacle comical, could only laugh. The $6 million would be fine but the sheer absurdity deserved at least a chuckle. This triviality could have been handled in a straightforward email.
“I can’t talk for the group but I can’t imagine we’re not going to be OK with this,” Baeria said.
Millstein turned to the last group represented in the room. “Ken, that leaves—”
“We are not chipping in!” shouted Ken Liang. This was the moment Millstein had been dreading. There was an old expression in complex restructurings—“just get everybody into a room”—about hashing out a lasting compromise. That approach suddenly did not look so promising.
Millstein had cut his teeth as a lawyer in the mid-1980s just as corporate raiders and private equity firms were emerging on Wall Street. They were called “barbarians,” both for their slash-and-burn tactics and their insatiable thirst for profits and glory. Thirty years later, private equity had become a mainstream, if not celebrated, part of the financial establishment. No longer were private equity firms condemned as savages; rather they were earnest entrepreneurs, builders of businesses, and saviors of pensioners.
The distressed debt hedge fund now filled the pirate caricature on Wall Street. The invention of the junk bond had fueled the takeover mania of the 1980s. High yield bonds—or junk—allowed small or risky companies, along with buccaneering raiders, to tap the capital markets from which they had otherwise been closed off. As those deals went bust in the early 1990s, the debt became “distressed,” and the “vulture” investor was born. Vulture funds could scoop up the debt of troubled companies for nickels and dimes and take control of over-indebted but otherwise viable companies.
By September 2016, Caesars’ debt was almost exclusively owned by these distressed debt investors. These men were not just financial wizards—they had also weaponized the law, using their knowledge of dense legalese in loan agreements and bond indentures to play their hands in both boardroom negotiations and in courtroom showdowns. These funds were now poised to take control of Caesars and make billions of dollars on their distressed debt wagers.
Liang was an executive at Oaktree Capital Management, the $100 billion money manager in Los Angeles co-founded by two of the earliest and most successful distressed debt investors, Howard Marks and Bruce Karsh. Oaktree was one of Caesars’ junior “second-lien” bondholders. Liang, like Millstein, was in his late 50s but looked a decade younger. He had been a corporate lawyer for a time before joining Oaktree as its founding general counsel in the 1990s. Over the years, his knowledge of transaction law made him instrumental in navigating distressed-debt transactions. He had also forged a well-earned reputation as an obstinate, if not unpleasant, negotiator.
Millstein had known Liang for two decades and had his share of run-ins with him. Oaktree was about to become a huge winner in the Caesars bankruptcy, so Millstein was hoping for some magnanimity or at least pragmatism. Instead, the two Oaktree representatives at Kirkland that day—Liang had come with his 37-year-old colleague Kaj Vazales—had only brought fury that had been simmering for almost three years.
The central figure in the Caesars brawl was, however, absent from the room. Apollo Global Management had been one of the two principal private equity firms who had acquired the storied casino chain in 2008. Apollo was defined by two traits: genius and impunity. The firm was co-founded by Leon Black, Michael Milken’s right-hand man at Drexel Burnham Lambert. Milken had famously invented the junk bond market in the 1980s. After Milken’s fall from grace, Black, in 1990, had formed Apollo to exploit the imploding debt markets that Milken and Drexel themselves had wrought.
Over its twenty-five-year existence, Apollo’s hallmark had become discerning opportunity where no one else dare tread and then striking deals everyone else was too timid to make. Apollo also liked to play by its own rules, forcing its adversaries to think twice about confrontation. As Apollo’s success compounded over the years, only a few ever stood in its way. Apollo had become, unquestionably, the most feared private equity firm in the world.
In the lean years after the financial crisis, Apollo’s clever deal making had, against all odds, kept Caesars alive in the hope that its fortunes would eventually snap back. Apollo’s Caesars investment was led by Marc Rowan, regarded by many as the canniest investor at Apollo and perhaps on all of Wall Street. Rowan’s apprentice was a young fireball, David Sambur, whose intellectual horsepower and doggedness left him basically running the casino behemoth while in only his early 30s. Rowan’s calm and charm belied his ruthlessness. Sambur, on the other hand, was a pit bull constantly in attack mode.
Together, their gifts kept Caesars afloat longer than any other private equity firm could—or even should—have. Caesars filed for bankruptcy in early 2015 under Chapter 11 of the Bankruptcy Code, leading to a court-supervised free-for-all to determine who would have the right to take control of the revitalized company: Apollo and its partner TPG Capital, or the vulture distressed-debt investors, who happened to be the world’s biggest, baddest hedge funds.
The bankruptcy would eventually shine a harsh light on Rowan and Sambur’s relentless financial engineering that had sustained Apollo’s investment in Caesars. Their machinations had led to credible accusations of a modern day casino heist; fraudulent transfers and boardroom impropriety to the tune of $5 billion in liability. All the while, a complicated game of three-dimensional chess had broken out between multiple creditor groups and the private equity owners. The dispute even migrated to the back rooms of Congress.
For years, it looked like Oaktree would be crushed by Apollo. Junior creditors like Oaktree rarely did well in situations like Caesars. Apollo was masterful at rallying senior creditors to crush those at the bottom of the totem pole. In fact, that is exactly what Apollo had done in joining forces with Elliott and GSO. But through the course of the 2016 bankruptcy case, Oaktree and its running mate, the fabled Appaloosa Management, had methodically outfoxed Apollo in court. Suddenly, they had the mighty Apollo over a barrel. Now Oaktree and Appaloosa were on the verge of making billions for their group. All they had to do in this conference room was to show a little grace and kick back $50 million into the pot. Alas, that was still too much for Liang and Vazales to bear.
“Now guys, there’s no need to be unreasonable,” Ryan Mollett calmly explained to the Oaktree duo. Oaktree was risking the massive profits all the creditors group were going to make at the expense of Apollo by not paying their penny. Oaktree needed to be a team player, explained Mollett.
“Go fuck yourself,” Liang told Mollett. “We fought our way into this room. All of you were cramming me down for zero fucking dollars during the last two years. Where was ‘the team’ then? Where is ‘the team’ on the preferred stock sweetheart deal Elliott is getting now? The rest of you can pay for this. If the deal breaks, fine. If you think it’s such a great deal, then give back some of your 120 percent recovery. I’m not reaching into your pocket. Don’t reach into mine,” screamed Liang.
“Ken, we are at the one-inch line,” Mollett pleaded again.
The senior creditors like Mollett’s GSO and Miller’s Elliott were set to make recoveries greater than 100 percent. Liang’s junior creditor group was allocated sixty-six cents on the dollar, which was less than 100 cent par recovery they were theoretically owed. Still, sixty-six cents was nearly ten times what they were slated to get two years earlier.
The Kirkland conference room had glass windows that made the room visible to the outside lobby but could be fogged for privacy by hitting a switch. For better or worse, the windows remained clear for the duration of the meeting and several lawyers sat outside watching the fireworks involving their clients. One of them remarked that the wild-but-silent gesticulating was reminiscent of a Charlie Chaplin film.
“We are asking you, institutionally, to do the right thing here,” Jon Pollock, the co-CEO of Elliott, jumped in.
“Who are you?” shouted the incredulous Liang.
Pollack had not, like Dave Miller, been handling the Caesars investment on a day-to-day basis. There was no particular reason the Los Angeles-based Liang should have known who Pollack was. Still, he was an elder statesman of Elliott and highly respected across Wall Street. Liang was well-known for his outbursts, but this insolence shocked everyone and probably should have embarrassed Liang. Liang, however, was too busy gloating about his triumph in the case and taunting all these putative allies in the room whom he believed had betrayed him.
“Apollo stole from us. They can pay the difference. We are leaving thirty-four cents on the table. We are in the business of loaning money to private equity companies and this would be bad for business,” Oaktree’s Kaj Vazales interjected, explaining the precedent that caving now could set. Whatever grievance Oaktree had with its fellow creditors, it paled relative to the rage it harbored for Apollo, whose wheeling-and-dealing was the single, defining issue of the bankruptcy. Oaktree is here to drink the blood of Apollo, one person in the room would recall thinking at the time.
“Oaktree does private equity stuff too. Maybe next time Oaktree is on the other side of this,” Millstein tried to reason.
“Let me know the next time Howard Marks and Bruce Karsh get personally sued and have their personal bank statements subpoenaed,” Liang fired back. Lumping the Oaktree founders with Apollo did not sit well with Liang.
Rowan and Sambur, along with David Bonderman, the TPG co-founder, were facing the possibility of personal liability in the case, a highly unusual situation that underscored the severity of the wrongdoing allegations against them. Worse yet, the week prior, the bankruptcy judge had allowed creditors to review their personal financial information to understand their wherewithal to satisfy a potential judgment, a decision that helped prompt this endgame.
But Apollo told Millstein they were not committing any more than the nearly $6 billion they had pledged to settle the Caesars case. The deadline for the deal was roughly 13 hours later at midnight on Friday, September 23.
“I’m disappointed in you, Ken. Oaktree has a reputation for being constructive,” Millstein said.
“Well, I’m disappointed in you, Jim!” Liang fired back. Millstein and Liang then retreated to a private side room to continue the negotiation.
“Ken, you’ve done your grandstanding. Now you are just making a bad deal for yourself.”
As a restructuring banker, Millstein was fundamentally a dealmaker: Efficiently get adversaries on board to make a fair compromise and move forward. It was not supposed to be emotional or moral, but rather purely transactional. That’s how everybody made the most money. Good and evil, right and wrong, did not apply in this world.
But as Liang had already proved, emotion had long overtaken Caesars, and Millstein, as one ostensible referee in the process, had been caught in the crossfire between Apollo and all the creditors. The whole episode was sickening and exhausting to him. The restructuring world had seemed to take a turn for the worse since he had returned from Washington. Too many people—and often twenty- and thirty-something-year-old men trying too hard to prove themselves as tough guys—private equity and hedge fund alike, were fighting merely out of vanity. Most of these funds took money from identical pensions—Texas Teachers, CalPers, CalSTRS. These fights to the death just moved money from different pockets of the same investors.
Oaktree and Appaloosa, unsurprisingly, had a much different perspective. Vazales stayed in the main room and continued the negotiation with the rest of the creditors.
“We had to claw our way to victory. We’ve driven this case to its conclusion and you are not spending our recovery,” Vazales said. He was a mild-mannered fellow far less prone to theatrical outbursts than his colleague Liang, yet he remained militant. Unlike Millstein, the teams from Oaktree and Appaloosa believed there were higher stakes at play. Private equity firms, they believed—best exemplified by Apollo—had become far too abusive of creditors, wielding legal documents and hardball negotiating tactics as swords to take value from loan and bondholders that simply did not belong to them. To Oaktree and Appaloosa, nothing less than the sanctity of the US capital markets was at stake in this room.
The senior Caesars creditors were not thrilled with Apollo either. But they were less sanctimonious about it and had been begging Oaktree and Appaloosa for months to back off their crusade, which was imperiling a delicate compromise with the private equity firm.
Jim Millstein and Ken Liang returned to the large conference room after their sidebar conversation. Oaktree and the junior bondholders were not going to budge.
Dave Miller and Jon Pollock quickly left the meeting since there was nothing left to discuss. They knew there was only one way this deal was going to get done in the next 12 hours. Higher powers needed to be summoned—a group of billionaires, who Wall Street types often referred to as the “MoUs”, the Masters of the Universe.
After Elliott’s exit, Liang and Vazales left to have lunch and debrief at Casa Lever, a Midtown power spot. On the walk over, Liang’s phone rang. It was an Oaktree number. The founders of the firm, Howard Marks and Bruce Karsh, were on the line. “Paul Singer just called us and he was just wondering what you guys are doing on Caesars?”
Financial Times U.S. Lex editor Sujeet Indap and Fitch Solutions’ news editor Max Frumes are the authors of The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street. Their book launched this week.