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Arnold M. Knightly

Massive $23.1 billion debt hanging over Harrah's

18 March 2009

LAS VEGAS, Nevada -- Harrah's Entertainment may not be able to generate enough cash flow or secure additional loans to service its $23.1 billion debt, the company said Tuesday in a filing with the Securities and Exchange Commission.

The world's largest casino company by revenue said Friday that its revenues last year dropped 10.3 percent to $10.13 billion from 2007. That drove down cash flow 16 percent, from $2.81 billion in 2007 to $2.36 billion last year.

Harrah's Chairman and Chief Executive Officer Gary Loveman received $39.6 million in compensation, including $2 million in base salary, last year, according to the filing. The 48-year-old executive's compensation was up 157 percent from the $15.4 million he received in 2007.

Analysts project that Harrah's will continue to see declines in revenue and cash flow as the company becomes increasingly leveraged and at risk of default.

Moody's Investors Service on Tuesday downgraded the gaming giant's probability of default rating because of its belief the company will generate negative cash flow through 2010. Moody's moved Harrah's debt rating to Ca, or extremely speculative, from Caa3, or in poor standing.

The debt load could limit Harrah's, including its ability to borrow money, which could affect its ability to develop and exploit new business opportunities.

The company said it had $650.5 million in cash on Dec. 31, an 8 percent decrease from the $710 million it held at the end of 2007.

Harrah's aggressively cut costs last year to save cash, the filing shows. The filing said Harrah's has cut its work force by 8 percent -- or 7,000 workers -- to 80,000 workers since 2007.

In August, Harrah's began a "comprehensive cost reduction study ... in light of the severe economic downturn and adverse conditions in the travel and leisure industry," the filing shows.

The company identified $534.7 million in estimated cost savings.

Andrew Zarnett, a bond analyst covering casino companies for Deutsche Bank, expressed concern that further cost reduction efforts could hurt on the company.

"Actions have been taken to reduce costs, but we fear these actions, albeit necessary, will aggravate an already discouraged work force and further degrade properties already in need of great repair," Zarnett wrote Monday in an investors' note. "This could have the unfortunate repercussion of alienating customers, forcing them to seek play at competitors."

The company's bottom line has been hit hard because of the huge debt accumulated because of the $30.7 billion buyout of Harrah's by Apollo Management and TPG Capital in January 2008 and the subsequent economic downturn that has depressed consumer spending and travel.

Tuesday's filing also reported that the private equity firms received a combined transaction fee of $200 million last year for "structuring the merger and debt financing."

Harrah's also pays the joint venture an annual "monitoring fee" of $30 million, or 1 percent, of company cash flow, whichever is greater.

Company executives also cashed out on the $90 per share buyout led by Loveman, who received $10.3 million worth of stock in the merger. Loveman was scheduled to receive $94 million in stock, but presumably reinvested the vast majority back into the buyout, as did other top executives.

Massive $23.1 billion debt hanging over Harrah's is republished from