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Analyst: Harrah's debt may continue to weaken

18 June 2008

NEW YORK -- As reported by Reuters: "Harrah's Entertainment Inc's debt may weaken from already distressed levels as heavy capital spending and interest payments absorb cash flows at a time when the casino operator is also facing declining gambling revenues.

"And to conserve cash, Harrah's may exercise an option to pay its pay-in-kind (PIK) toggle bonds with additional debt, rather than cash payments, analysts said.

Harrah's in January completed a $17.3 billion buyout by private equity firms Apollo Global Management LLC and TPG Capital LP [TPG.UL], which was financed by more than $11 billion in debt.

"'They pushed it to the limit in terms of leveraging up and I feel its probably not getting any better,' said Gimme Credit analyst Kim Noland.

...Noland estimates the company may draw as much as $1.7 billion from its revolving credit facility to fund its spending, with the new debt ranking above its unsecured debt in the capital structure.

... Harrah's last month reported a drop in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of 9.9 percent for the first quarter, to $454 million from $626 million in the year earlier period.

... Amid a weakening economy Harrah's also has a number of debt maturities coming due from 2010, making it likely that they will choose to exercise an option on their payment-in-kind notes to pay interest with debt, and conserve cash..."

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