Sunday, August 28, 2016

Do Management Fees Open Door for PEU Liability?

Despite hold harmless agreements on paper and corporate shells set up to insulate liability, it is logical that a private equity underwriter (PEU) could be held accountable for management decisions it makes on behalf of its affiliate.  PEUs generally charge their company millions in annual management fees.  Take casino giant Caesar's, owned by PEUs Apollo Global and TPG. 

An acquired company pays its private equity owners an annual sum for ongoing management and advisory services. You might have heard about these recently in the context of troubled casino company Caesar’s Entertainment CZR , which each year pays nearly $30 million to its private equity owners — Apollo Global Management APO and TPG Capital — despite annual losses north of $1.4 billion (Caesar’s could have killed the arrangement during last year’s IPO, but it would have been forced to pay $195 million the privilege).
That's on top of the transaction fee charged by PEUs when they consummate the deal.

When they took Harrah’s (now Caesar's) private, TPG and Apollo collected a $200 million “transaction fee” for the deal, split evenly between the two companies.
Caesar bondholders sued the operating company and just received the right to sue the next shell up, Caesar's Entertainment Corp..   Courts have not granted the right to sue Apollo Global or TPG directly.

Caesar's organizational structure is shown in their annual 10-K filing.  The list of Caesar's subsidiaries is five and a half pages long.

Here's what the 10-K said about the bankruptcy:

As a result of CEOC’s highly-leveraged capital structure and the general decline in its gaming results since 2007, on January 15, 2015, CEOC and certain of its U.S. subsidiaries (collectively, the “Debtors”) voluntarily filed for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Because CEOC is under the control of the Bankruptcy Court, CEC deconsolidated this subsidiary effective January 15, 2015 
And who set up CEOC's highly leveraged capital structure?   That would be Apollo Global and TPG. 

CEOC bondholder's are one step closer to Caesar's sponsors given their right to sue Caesar's Entertainment. I'd love to see the day when PEU sponsors have to defend their actions in court for their decimation and looting.  Maybe one day they'll have to pay.