With high debt load, Moody’s report questions Harrah’s strategy

By Steve Green

Published Thursday, July 22, 2010 | 10:59 a.m.

Updated Thursday, July 22, 2010 | 5:48 p.m.

Backed by investors with super-deep pockets, casino giant Harrah's Entertainment Inc. of Las Vegas has forged ahead during the recession with a growth strategy despite losing billions of dollars and carrying a hefty debt load of $22 billion.

Analyst Peggy Holloway at Moody's Investors Service and others at Moody's issued a report this week questioning the growth strategy and saying "Harrah’s significant debt service burden leaves the company with insufficient free cash flow for maintenance of existing assets or growth initiatives."

"Harrah’s will likely need to reduce debt by selling assets, going public or restructuring its debt burden. Restructuring would likely result in impairment to debt holder claims, and obstacles accompany all of these options," said Moody's report, noting Harrah's, like other casino operators, faces challenges in boosting revenue as "gaming demand isn’t likely to rebound or to reach previous peaks quickly."

Harrah's, with nine Las Vegas Strip-area properties such as Caesars Palace and Bally's, hasn't yet reported second quarter financial results. Through 2008, 2009 and the first quarter of 2010 it racked up $4.4 billion in losses, though much of that was on paper in the form of asset writedowns. The value of some Harrah's assets was written down because their ability to generate profits declined during the recession.

The losses would have been even higher, but Harrah's gained $5.7 billion during this period with financial engineering that resulted in the extinguishment of some debt, the replacement of some higher-cost debt with lower-cost debt and the extension of debt due dates.

Still, Moody's noted, Harrah's faces substantial annual interest costs of nearly $1.7 billion. Even though Harrah's has reduced its annual operating costs by hundreds of millions of dollars, that's a big number for a company with net revenue in 2009 of $8.9 billion.

Moody's says this means the company's debt payments consume about 90 percent of earnings before interest, taxes, depreciation and amortization generated at the property level, "leaving insufficient free cash flow for debt reduction or capital spending."

"We are also concerned that Harrah’s isn’t investing enough in its properties, which will hurt its competitive position over time. Additionally, management seems more interested in jump-starting growth initiatives than in reducing debt," Moody's report said.

Harrah's this year acquired Planet Hollywood on the Las Vegas Strip and has announced plans to acquire the Thistledown Race Track in Ohio.

Moody's, in highlighting Harrah's hefty interest expenses and expansion agenda, said in the new report: "Harrah's must address its significant debt burden."

Harrah's had no immediate comment on the Moody's report.

Also Thursday, Harrah's announced another possible expansion, this one in Kansas.

Harrah's submitted an application to the Kansas Lottery Commission for a proposed Harrah's casino resort in Mulvane, Sumner County, south of Wichita. Two other developers submitted competing proposals.

The Harrah's project would include a casino, multiple restaurants, a 100-room boutique hotel, a sports bar, food court, retail space and up to 15,000 square feet of entertainment and meeting space. Harrah's said that with sufficient land for future expansion, additional future amenities under consideration include a golf course, water park, RV park, spa, tennis facility, sporting clay facility and expansion of the hotel.

The cost of the proposed development wasn't immediately disclosed.

Investors in Harrah's include big Wall Street players with multibillion dollar portfolios.

They include Apollo Management LP, TPG Capital (Texas Pacific Group) and hedge fund player John Paulson. Harrah's executives and Paulson have been considering registering for public trading a minority share of the company's now privately-held stock.

A $710 million debt-for-equity deal with Paulson, announced June 3, was described by Bloomberg News as marking a "shift in efforts to salvage the company from debt restructuring and cost-cutting to equity capital and growth."

Paulson's Paulson & Co. appears to be bullish not just on Harrah's, but on Las Vegas and on gaming. Paulson has also recently purchased 40 million shares of MGM Resorts International and 4 million shares of Boyd Gaming Corp., becoming a big shareholder in both companies.