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Arnold M. Knightly

Harrah's owners buying part of debt

16 March 2009

LAS VEGAS, Nevada -- Harrah's Entertainment's owners are buying part of the company's debt to help ensure they remain in control of the company should it be forced into bankruptcy, Bloomberg News reported Friday.

The report came on the day that Harrah's announced fourth-quarter and 2008 earnings numbers. The company said it lost more than $5 billion in the fourth quarter and for the full year, largely because of a $5.49 billion write-down it took in the fourth quarter.

Private equity firms Apollo Management and TPG Capital have bought nearly $2 billion in loans, and may hold as much as 20 percent of Harrah's "second-lien" loans through a proposed debt exchange, according to a copy of an offering memorandum dated March 5 obtained by Bloomberg News.

This activity includes a $250 million cash offer made by the owners for a pair of debt notes issued in December as part of a larger $2.8 billion debt swap announced March 5 by the company.

Dennis Farrell Jr., a bond analyst with Wachovia Capital Markets, said, if true, the debt purchases mean Apollo and TPG would be well positioned if the company enters bankruptcy.

"(Apollo and TPG) are continuing to reinvest in the company, but they're investing on the debt side," Farrell said. "They're trying to position themselves to play a major role in the company if and when they restructure."

The private equity firms bought Harrah's Entertainment for $30.7 billion in January 2008.

The company successfully reduced its $24.1 billion debt load by $1.16 billion through a debt exchange completed in January.

Farrell said the company will probably have to go through some type of financial restructuring if customer spending and visitation remains depressed through 2009.

"That's a positive for the company in general," Farrell said. "They're carrying too heavy a debt burden and cash flow declines only magnify the problem. That's why they're moving forward with all these exchanges."

Harrah's, the world's largest casino operator by revenue, on Friday reported a net loss of $5.3 billion in the fourth quarter.

The company said the loss was driven largely by a $5.49 billion noncash write-down it took in the fourth quarter as it "considered current market conditions" and lowered some of its property values and cash flow projections.

Nearly $2.6 billion of the write-down was recorded at the company's Las Vegas operations.

For the year, Harrah's reported a $5.2 billion loss because of the fourth-quarter write-down.

Company revenues slipped 6.4 percent to $10.13 billion last year from $10.83 billion the previous year, and cash flow dropped 14.5 percent from $2.81 billion in 2007 to $2.36 billion for the 12 months ending in December.

In Las Vegas, revenues dropped 10.3 percent to $3.25 billion last year from $3.63 billion in 2007. Cash flow dropped 15.7 percent to $981.4 million from $1.16 billion.

For the fourth quarter, the company also reported a $946 million gain from a debt exchange completed in December.

Company revenues dropped 13.3 percent for the quarter ended Dec. 31, to $2.28 billion from $2.63 billion in 2007.

Quarterly adjusted cash flow, defined as earnings before interest, taxes, depreciation and amortization, fell 26.6 percent to $453.6 million from $618.1 million in 2007.

In Las Vegas, fourth-quarter revenues dropped 20.3 percent, to $721.4 million from $905 million in 2007, and cash flow dropped 33.4 percent to $189.6 million from $284.6 million.

The declines were driven by fewer customers and lower customer spending. The company said the loss also was due to fewer hotel rooms being open because of remediation projects at the Rio, Flamingo and Harrah's Las Vegas that were required because earlier work was completed without the proper construction permits.

The company did not hold an earnings call because of a quiet period due to a debt exchange offer made last week.

In a statement, Chairman and Chief Executive Officer Gary Loveman said the company has reduced labor and marketing costs to control expenses.

"While the faltering economy that's affecting virtually every business in America was the primary factor in the impairment charge and continued to impact our operating results during the fourth quarter, we ended the year with some significant accomplishments," Loveman said. "As we move into a year likely to present continuing economic challenges, we are focused on the need to remain flexible in our staffing and marketing requirements and to be nimble in responding to changes in customer and competitor behavior."

Loveman noted the company suspended construction in January on the 660-room Octavius Tower at Caesars Palace, while continuing work on 110,000 square feet of new meeting and convention space.

"We made this decision because the weak economy is expected to continue to impact demand for rooms in the Las Vegas market over the next several months even as additional supply is added by other operators," Loveman said in the statement.

"Once demand improves, the additional rooms in the Octavius Tower can be completed in a matter of months. Meanwhile, we continued to move forward with plans to open the new convention center under construction at Caesars Palace by midsummer 2009 due to strong advance bookings for that facility," he added.

Harrah's owners buying part of debt is republished from