Harrah's Entertainment, bought by Apollo and TPG in 2008 for $27 billion, is not “out of the woods” and will need to sell assets, restructure or go public to get out from under its $22 billion debt burden.
In a report released Wednesday, Moody’s points out that Harrah’s has pursued a number of debt exchanges to reduce its debt and push back maturity dates to avoid bankruptcy, but these measures are perceived as merely deferring Harrah’s problems, rather than solving them.
“We don’t…view these developments as a sign that Harrah’s is out of the woods,” the report says. Furthermore, the company’s long-term credit profile remains weak, as its overall leverage is roughly ten times its EBITDA, and annual interest payments of $1.8 billion chew up huge portions of its earnings.
In the second quarter, Harrah’s increased its liquidity by issuing $750 million of second lien debt. In June, the company announced a debt-for-equity swap with Apollo and TPG – expected to close by the first quarter 2011 – to exchange $1.1 billion of debt for up to roughly 15 percent of common equity. The latter transaction is expected to provide Harrah’s with a cash infusion of $577 million, but Moody’s expects the company to use a “large portion” of this cash to fund capital spending rather than to reduce its debt.
“Harrah’s management seems more interested in jump-starting growth initiatives than in reducing debt,” Moody's said.
While Moody’s does foresee a rebound in the US gaming markets “at some point”, it does not expect a return to previous peaks “anytime soon”. As a result, the report states Harrah’s will likely need to sell assets, go public or restructure its debt burden, but restructuring would probably “result in impairment to debt holder claims”.
Several private equity firms involved in huge buyouts during the credit peak have battled to control the debt burdens on their companies, especially in the downturn. Firms like Apollo, Blackstone and KKR have successfully refinanced large portions of debt this year as credit markets have opened up. Blackstone said during an earnings call Thursday it has been able to refinance, reduce or push back about $52 billion of debt since the beginning of 2009.