Apollo Global Management LLC’s dual stakes in an insurer and the largest operator of U.S. casinos are drawing scrutiny by New York’s top financial regulator, who doesn’t want policyholders exposed to the gambling firm’s debt, a person briefed on the matter said.
Benjamin Lawsky, the superintendent of New York’s Department of Financial Services, is pressing for confirmation that life insurer Athene Holding Ltd. isn’t taking on bonds sold by Caesars Entertainment Corp., said the person, who asked not to be named because the matter is confidential. The review is informal, according to the person.
Caesars is suffering from a slump in gambling revenue and is struggling to restructure debt from its $30.7 billion buyout by Apollo and TPG Capital in 2008. Apollo, which has been trying to shore up Caesars, promised Lawsky last year that it would maintain Athene’s capital levels after he let the insurer acquire Aviva Life & Annuity Co. of New York.
Lawsky’s review marks the regulator’s first significant attempt to delve into the relationship between private-equity firms and insurance affiliates. In addition to Apollo’s stake in Athene, affiliates of Guggenheim Partners and Harbinger Group have also acquired insurance companies in the past three years.
Athene has sold off less-risky investments in government-guaranteed bonds and sharply increased private equity holdings in its insurance unit, Jim Baker, research coordinator for the hospitality industry union Unite Here, said in testimony to Iowa regulators last year. The union monitors private equity firms and the impact they have on worker pensions.
“Athene’s actions reveal a strategy that relies substantially on rapid growth, increasing the risk profile of the assets underlying the annuity contracts, increasing leverage, and lowering capital as a percentage of invested assets,” he said.
Unlike more liquid investments such as mutual funds, annuities are subject to steep penalties if holders, wary of the change in investment strategy, want to get out of the contract, he said.
Lawsky is returning to the matter as Las Vegas-based Caesars clashes with a group of bondholders from its operating unit who objected to the company’s restructuring plans. Caesars stripped guarantees on most of the operating unit’s $17.4 billion in outstanding debt.
The group of 13 investors includes hedge funds and investment management groups Appaloosa Management LP, Oaktree Capital Group LLC, Canyon Capital Advisors LLC, Caspian Capital LP and Contrarian Capital Management LLC, a person familiar with the matter told Bloomberg News last month.
The group filed a notice of default against the casino operator last month and said it would “take all steps necessary” to rescind recent asset sales and restore the debt guarantees, according to a June 6 Caesars filing.
Moody’s downgraded Caesars’ debt March 28, saying an agreement to sell properties to an affiliate to fund losses would hurt the company’s overall credit profile. Moody’s rates Caesars’ long-term debt as Caa3, nine levels below investment grade.
In May the company announced a refinancing plan at the same time it mounted an aggressive bid to win approval to open a casino in New York.
Caesars’ 10-percent, second-lien notes due in 2018, have lost two-thirds of their value in the past three years, trading recently at 35 cents on the dollar, according to Bloomberg data.
Lawsky has been interested in the role played by private equity firms in the insurance industry since early 2013, after Guggenheim announced its intention to acquire Sun Life Assurance Co of Canada.
In an April 2013 speech, he noted that annuity firms have become attractive acquisition targets for private-equity firms.
“There is a risk that these companies may not be delivering the level of compliance and customer service that we’d expect of them given the importance of this product to so many seniors on fixed incomes,” Lawsky said in the speech. The risk is that “their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders.”
Carolyn Sargent, a spokeswoman for Apollo, and Caitlin Ferrell, a spokeswoman for the Department of Financial Services, declined to comment.
With assistance from Keri Geiger and Sridhar Natarajan in New York.