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Arnold M. Knightly

Harrah's chief stays confident about company

23 June 2009

LAS VEGAS, Nevada –- Although some industry insiders and observers have had second thoughts about the wisdom of private equity's entry into the gaming industry, Harrah's Entertainment chief Gary Loveman isn't one of them.

"(Being privately owned) provides an ability to focus on long-term viability and the health of the business," Loveman said. "(Apollo Management and TPG Capital) bring a lot of resources and a lot of expertise to the company that in a typical independent company setting you don't have."

Loveman serves as chairman and chief executive officer of Harrah's, the largest gaming company by revenue, with more than 85,000 employees and properties on five continents.

Harrah's is one of two prominent gaming companies -- Station Casinos is the other -- taken over by private equity groups and larded with debt before the economy sank into recession more than a year ago. When hard times hit, casino companies saw revenues plunge as consumers cut back on spending, trips to Las Vegas and gambling. Companies such as Harrah's that had loaded up on debt to pay for aggressive expansion projects and buyouts were left struggling to make interest payments.

Harrah's has reduced its outstanding debt by approximately $3 billion in the past year through a combination of debt-exchange offers. But Barbara Cappaert, a bond analyst with KDP Investment Advisors, recently wrote in a note to investors that Harrah's, which has more than $600 million in debt maturing next year, is "not out of the woods."

Peggy Holloway, vice president and senior credit officer for Moody's Investors Service, wrote last month that Harrah's may breach some of its debt covenants "within the next 12-month period unless operating results begin to improve from current levels."

Loveman, however, is confident Harrah's is well positioned to weather the economic storm through the next couple of years while his company and its private equity owners work through the company's nearly $24 billion debt load.

"We're very comfortable with our liquidity," the 49-year-old Loveman said. "We have a position, with respect to our liquidity, that is quite comfortable (given) our upcoming debt retirements in 2010 and 2011."

Although Loveman would not discuss whether the company might have to eventually seek to restructure its debt in bankruptcy court, he said that analysts and financial experts "who scrutinize our public disclosures through the first quarter will be confident the stability of the company is significant."

Loveman insists that although the company's January 2008 takeover doubled Harrah's debt from $12.4 billion, going private was still the right move for a company its size.

In fact, he said, being owned by "two deeply resourced partners" in the private equity industry is one of Harrah's biggest assets during the current economic crisis.

"They are deeply involved in the capital markets activities we're involved with," he said "They provide tremendous bandwidth and expertise to those activities on our behalf. They are really world-class in those areas and I lean on them extensively for counsel and advice and competence in those areas."

And despite the two private equity firms having seats on the gaming company's board, Loveman said the two firms aren't involved in the casino company's day-to-day operations.

What TPG and Apollo have done is buy more than $2 billion in Harrah's loans to fund cash-for-debt swaps earlier this year.

Because of TPG and Apollo's financial muscle, Loveman said Harrah's isn't at a disadvantage compared with publicly held gaming companies that raise cash through public offerings.

In mid-May, MGM Mirage announced its hopes to raise $1 billion through a public stock offering. Wynn Resorts Ltd. and Las Vegas Sands Corp. have made similar moves in the past year.

Harrah's announced a similar plan last month to sell $1 billion in new notes that will not mature until 2017 to raise cash to buy back more debt.

"For us, the public market, at this point in our history, it doesn't bring much to us," Loveman said. "There hasn't been anything I've wanted to do that I've been unable to do because we're not a public company."

Loveman said the company also is not following its biggest competitor, MGM Mirage, by offering to sell any of its casinos or land holdings to help reduce debt.

"In the case of MGM Mirage, a process was set up to market specific properties," Loveman said. "Banks were hired and materials were prepared and delivered to people who might consider participating. We haven't done anything of that sort. We have no explicit process, we have no advisers maintained to sell any of our assets."

Harrah's would, however, entertain offers if a buyer arrives with the ability to purchase an "asset we don't consider essential to our strategy."

Loveman, however, said with the current credit markets, it's unlikely a legitimate buyer would be available.

While Loveman sees his company working its way through the downturn, he acknowledges that it is going to take "a little while" for Strip visitor and revenue levels to return to their record-breaking 2007 and early 2008 levels.

Free and independent travelers, lured by low room rates and airline fares, are still coming to Las Vegas, as are high-end players.

The convention and exposition business, however, has suffered greatly, because of comments made by people he calls "leading political lights in the country."

President Barack Obama's admonition that companies that were receiving public bailout money shouldn't be spending money on trips to Las Vegas, made financial service and publicly traded companies "quite risk-averse" about choosing Las Vegas as a site for meetings, he said.

"The consequence of that loss of that demand is we're filling rooms that would otherwise be dedicated to those customers with a more value-oriented promotional market," Loveman said. "That is, to a large degree, why you can go online day and night and see these unbelievably attractive offers coming in from all of us to try to fill these rooms.

"That's the hole that has to get plugged," he said. "Then I think you will see the rest of the business firm up."

He predicts it will be 2011 or 2012 before these institutions and companies feel comfortable enough to begin returning to Las Vegas in significant numbers.

Loveman, who has been CEO for six years, acknowledges that the current economy presents one of his biggest challenges in his 11 years at the company.

But, he said, it has also revitalized him.

"These last few months have been incredibly interesting, incredibly energizing, but at the same time very hard," he said. "You get up in the morning and, by and large, you face a series of problems all day long. Where as before, you faced some combination of problems and opportunities. You're doing a series of things that don't feel very good even though you know intellectually they're the right action to take.

"It's taxing. Metaphorically, you feel like you're leaning into a headwind all day long, every day."


Harrah's Entertainment is still interested in entering the Macau gaming market when an opportunity presents itself.

"It's the biggest market in the world," Loveman said. "I think it will be for as long as I can imagine."

The gaming company was shut out of the initial wave that saw Wynn Resorts Ltd., Las Vegas Sands Corp. and MGM Mirage secure concessions or partnerships to operate casinos in the Chinese enclave.

In September 2007, the company paid $577.7 million for the 175-acre Macau Orient Golf Course and the rights to a land concession contract. The par-72 course was rebranded Caesars Golf Macau in December as part of a nearly $26 million redevelopment of the club.

Loveman said the company is still interested in Macau because it is "close to a lot of customers Caesars has been in contact with for more than 40 years."

Loveman concluded: "While the euphoric valuation placed on Macau has abated a bit in recent months, and the rate of growth has slowed very substantially, it is still a terrific market and one we'd like to be active in. How we're active is now open to a variety of different alternatives as opposed to building yet another new building. But I think there will be lots of ways to do that over time, so it's a market we still covet."


Harrah's Entertainment still plans to build an arena on 10 acres behind Bally's on Flamingo Road. It's just a question of when, and who the company will partner with for the project.

Harrah's and Los Angeles-based Anschutz Entertainment Group, the world's biggest player in sports arenas, announced in August 2007 a partnership to build a 20,000-seat arena. It was expected to open in September 2010.

"Unfortunately, that project has been a victim of the same thing that has afflicted every other project, which is an absence of finance," Gary Loveman said. "But I think over time that project will get built."

Loveman said Harrah's has well-developed plans and architectural drawings that could be implemented quickly once the credit markets loosen.

He did not say whether AEG would still be involved with the project, but he added, "We'll partner with somebody. I think the idea still makes a lot of sense."

Loveman didn't have a timetable for when an arena might get started, he did say he believes a groundbreaking could happen within the next three years.

He also believes Las Vegas' chances of getting a professional sports franchise for the arena have improved during the economic downturn because the recession has left professional hockey and basketball franchises struggling in some markets.

"The actual arrival of the arena is going to be at least down to (2012, 2013)," Loveman said. "The dynamics of professional sports make it more, not less likely, we could have one or two franchises in Las Vegas."



"There's a modest cost associated with that and we just felt that in a period where we were being so careful with our finances that there was no hurry to do that," he said. "It is still our intention to change the company's name."