Harrah's Entertainment, bought by Apollo and TPG in 2008 for $27 billion, is not “out of the woods” and will need to sell assets, restructure or go public to get out from under its $22 billion debt burden.
In a report released Wednesday, ratings agency Moody’s points out that Harrah’s has pursued a number of debt exchanges to reduce its debt and push back maturity dates to avoid bankruptcy, but these measures are perceived to have deferred Harrah’s problems, rather than solved them.
“We don’t … view these developments as a sign that Harrah’s is out of the woods,” the report says. Furthermore, the company’s long-term credit profile remains weak, as its overall leverage is roughly 10 times its EBITDA, and annual interest payments of $1.8 billion chew up huge portions of its earnings.
In the second quarter, Harrah’s increased its liquidity by issuing $750 million of second lien debt. In June, the company announced a debt-for-equity swap with Apollo and TPG – expected to close by the first quarter 2011 – to exchange $1.1 billion of debt for up to roughly 15 percent of common equity. The latter transaction is expected to provide Harrah’s with a cash infusion of $577 million, but Moody’s expects the company to use a “large portion” of this cash to fund capital spending rather than to reduce its debt.
“Harrah’s management seems more interested in jump-starting growth initiatives than in reducing debt,” Moody's said.
While Moody’s does expect see a rebound in the US gaming markets “at some point”, it doesn't expect a return to previous peaks “anytime soon”. As a result, the report states Harrah’s would likely need to sell assets, go public or restructure its debt burden, the latter of which would probably “result in impairment to debt holder claims”.
Several firms involved in huge buyouts during the credit peak have battled to control the debt burdens on their companies, especially in the downturn, with some successfully refinancing large portions of debt this year. The Blackstone Group said during an earnings call Thursday it had refinanced, reduced or pushed back about $52 billion of debt since the beginning of 2009. In April, the firm reduced the debt secured by the Hilton hotel chain by $4 billion and pushed the hotel group's debt maturities by two years to the end of 2015. Blackstone acquired the global hotel group in 2007 for $26 billion, financing the deal using $20.6 billion of debt and $5.7 billion of equity.
Los Angeles-based Colony Capital also entered the gaming industry in 2007, when it led a consortium of investors in the $5.4 billion acquisition of Station Casinos in 2007, assuming $3.4 billion of debt. Station filed for bankruptcy protection last summer, with Colony and Fertitta Gaming – owned by Station's founding family Frank and Lorenzo Fertitta – since launching a $772 million stalking horse bid to take control of the company. The reorganisation plan would a newly-formed company owned by Colony, Fertitta and some of Station Casino’s mortgage lenders.