Sunday, May 10, 2015

PEU Karma for Deals Gone Bad

Several private equity deals unraveled badly for investors.  Among these are Apollo Global Management's Caesars Entertainment, The Carlyle Group's Carlyle Capital Corporation and Energy Future Holdings, owned by KKR and TPG.  All three went bankrupt.

Bloomberg reported that bond holders are reluctant to buy deft from Apollo Global affiliates.

Apollo Global Management LLC is meeting with some of the bond market’s biggest investors to smooth over strained relationships amid accusations it has shortchanged creditors of some of its biggest corporate buyout.

The private-equity firm co-founded by Leon Black will travel to the offices of money managers who buy high-yield debt, seeking to persuade them that the bonds and loans issued by its companies are worthwhile investments.

A group of bondholders in a bankrupt unit of Caesars Entertainment Corp., the casino operator Apollo and TPG Capital took private for $30.7 billion in 2008, has claimed in lawsuits that the business was stripped of billions of dollars in assets before the Chapter 11 filing in January.
Dallas Morning News provided the latest twist on Energy Future Holdings bankruptcy proceedings.

A U.S. bankruptcy judge put Energy Future Holdings’ restructuring plan on hold Monday, giving creditors more time to work on an alternative strategy to conclude the Texas electricity giant’s $42 billion bankruptcy case.

The ruling comes a little more than a year into what is one of the largest bankruptcies in U.S. history, pitting some of Wall Street’s biggest names against each other. In 2007 private equity firms KKR & Co. and TPG paid $40 billion to take over the former TXU Corp. through a leveraged buyout, betting that Texas power prices were poised to rise. They were wrong. 
Carlyle Group's latest 10-K included an update on their legal troubles with the failure of Carlyle Capital Corporation, a highly leveraged mortgage backed security scheme.

The Guernsey liquidators who took control of CCC in March 2008 filed four suits on July 7, 2010 against Carlyle, certain of its affiliates and the former directors of CCC in the Delaware Chancery Court, the Royal Court of Guernsey, the Superior Court of the District of Columbia and the Supreme Court of New York, New York County (Carlyle Capital Corporation Limited v. Conway et al.) seeking $1.0 billion in damages. They allege that Carlyle and the CCC board of directors were negligent, grossly negligent or willfully mismanaged the CCC investment program and breached certain fiduciary duties allegedly owed to CCC and its shareholders. The liquidators further allege (among other things) that the directors and Carlyle put the interests of Carlyle ahead of the interests of CCC and its shareholders and gave priority to preserving and enhancing Carlyle’s reputation and its “brand” over the best interests of CCC.

The Court (Royal Court of Guernsey) has set the case schedule and trial is scheduled for the first available date after February 1, 2016.
Carlyle's insurers have been freed from covering any liability in a case where plaintiffs "accused Carlyle of falsely promising high returns with little risk, failing to warn about the fund’s dimming prospects and ignoring the threat posed by deteriorating market conditions."

The wheels of justice rotate slowly and stiffed creditors have options while they turn.  They don't have to buy PEU debt without a risk premium.