Good article here:
US CREDIT-Harrah's risky as capex continues in weak economy
Tue Jun 17, 2008 9:18pm BST
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By Karen Brettell</PRE>
NEW YORK, June 17 (Reuters) - Harrah's Entertainment Inc'sdebt may weaken from already distressed levels as heavy capitalspending and interest payments absorb cash flows at a time whenthe casino operator is also facing declining gamblingrevenues.</PRE>
And to conserve cash, Harrah's may exercise an option topay its pay-in-kind (PIK) toggle bonds with additional debt,rather than cash payments, analysts said.</PRE>
Harrah's in January completed a $17.3 billion buyout byprivate equity firms Apollo Global Management LLC and TPGCapital LP [TPG.UL], which was financed by more than $11billion in debt.</PRE>
"They pushed it to the limit in terms of leveraging up andI feel its probably not getting any better," said Gimme Creditanalyst Kim Noland.</PRE>
"Even though they throw up a lot of cash they've gotinterest and maintenance capex that are going to eat up thepositive, and then they'll have to go negative to fund itsdevelopment capital spending," she said.</PRE>
Noland estimates the company may draw as much as $1.7billion from its revolving credit facility to fund itsspending, with the new debt ranking above its unsecured debt inthe capital structure.</PRE>
The cost to insure Harrah's unsecured debt with creditdefault swaps has jumped to an upfront cost of 21.5 percent, or$2.15 million to insure $10 million in debt for five years, inaddition to annual payments of 500 basis points, according toMarkit Intraday.</PRE>
Swaps trade upfront when the company is considereddistressed, typically when their spreads widen over 1000 basispoints. Harrah's swaps traded at 605 basis points at thebeginning of the year, according to Markit.</PRE>
"Harrah's is a particularly challenging name because afterthe LBO they have a lot of debt so people are pricing in a lotof risk there," said Christopher Snow, analyst at CreditSightsin New York.</PRE>
"People are concerned about the amount of supply that'sgoing to come to Las Vegas next year, they have a huge numberof rooms that are coming up that's going to challenge Harrah'spricing power," Snow said.</PRE>
Harrah's last month reported a drop in adjusted earningsbefore interest, taxes, depreciation and amortization (EBITDA)of 9.9 percent for the first quarter, to $454 million from $626million in the year earlier period.</PRE>
"People are trying to understand whether the market isstabilizing at these levels and if the industry has just lostthe weakest gambler, or if the economy will continue to weakenand you will see fewer people heading out to entertainthemselves at gaming tables," Snow said.</PRE>
PIK DEBT</PRE>
Amid a weakening economy Harrah's also has a number of debtmaturities coming due from 2010, making it likely that theywill choose to exercise an option on their payment-in-kindnotes to pay interest with debt, and conserve cash.</PRE>
Harrah's is "pretty liquid through 2010, and that's whenpeople start to get less comfortable with the name," Snow said."They are looking at a pretty high wall of maturities startingin 2010 and going through to 2011 and afterward."</PRE>
Paying the PIK notes with new debt may be one way offreeing up some liquidity.</PRE>
Harrah's Operating Co, a subsidiary of Harrah'sEntertainment, has $1.4 billion in outstanding PIK togglenotes, paying 10.75 percent coupon, due in 2018, according toStandard & Poor's.</PRE>
"I imagine they will PIK that coupon," said Gregg Klein,high yield analyst at BNP Paribas in New York. "They are ahighly leveraged company, I think they're being conservativewith their cash."</PRE>
"(Harrah's) probably won't fail but this is a tough one,"Klein added. "Its probably fairly priced, if anything therecould be some more downside." </PRE>
US CREDIT-Harrah's risky as capex continues in weak economy
Tue Jun 17, 2008 9:18pm BST
<INPUT id=CurrentSize type=hidden value=13 name=CurrentSize> Email |Print | Reprints
[-] Text [+]
By Karen Brettell</PRE>
NEW YORK, June 17 (Reuters) - Harrah's Entertainment Inc'sdebt may weaken from already distressed levels as heavy capitalspending and interest payments absorb cash flows at a time whenthe casino operator is also facing declining gamblingrevenues.</PRE>
And to conserve cash, Harrah's may exercise an option topay its pay-in-kind (PIK) toggle bonds with additional debt,rather than cash payments, analysts said.</PRE>
Harrah's in January completed a $17.3 billion buyout byprivate equity firms Apollo Global Management LLC and TPGCapital LP [TPG.UL], which was financed by more than $11billion in debt.</PRE>
"They pushed it to the limit in terms of leveraging up andI feel its probably not getting any better," said Gimme Creditanalyst Kim Noland.</PRE>
"Even though they throw up a lot of cash they've gotinterest and maintenance capex that are going to eat up thepositive, and then they'll have to go negative to fund itsdevelopment capital spending," she said.</PRE>
Noland estimates the company may draw as much as $1.7billion from its revolving credit facility to fund itsspending, with the new debt ranking above its unsecured debt inthe capital structure.</PRE>
The cost to insure Harrah's unsecured debt with creditdefault swaps has jumped to an upfront cost of 21.5 percent, or$2.15 million to insure $10 million in debt for five years, inaddition to annual payments of 500 basis points, according toMarkit Intraday.</PRE>
Swaps trade upfront when the company is considereddistressed, typically when their spreads widen over 1000 basispoints. Harrah's swaps traded at 605 basis points at thebeginning of the year, according to Markit.</PRE>
"Harrah's is a particularly challenging name because afterthe LBO they have a lot of debt so people are pricing in a lotof risk there," said Christopher Snow, analyst at CreditSightsin New York.</PRE>
"People are concerned about the amount of supply that'sgoing to come to Las Vegas next year, they have a huge numberof rooms that are coming up that's going to challenge Harrah'spricing power," Snow said.</PRE>
Harrah's last month reported a drop in adjusted earningsbefore interest, taxes, depreciation and amortization (EBITDA)of 9.9 percent for the first quarter, to $454 million from $626million in the year earlier period.</PRE>
"People are trying to understand whether the market isstabilizing at these levels and if the industry has just lostthe weakest gambler, or if the economy will continue to weakenand you will see fewer people heading out to entertainthemselves at gaming tables," Snow said.</PRE>
PIK DEBT</PRE>
Amid a weakening economy Harrah's also has a number of debtmaturities coming due from 2010, making it likely that theywill choose to exercise an option on their payment-in-kindnotes to pay interest with debt, and conserve cash.</PRE>
Harrah's is "pretty liquid through 2010, and that's whenpeople start to get less comfortable with the name," Snow said."They are looking at a pretty high wall of maturities startingin 2010 and going through to 2011 and afterward."</PRE>
Paying the PIK notes with new debt may be one way offreeing up some liquidity.</PRE>
Harrah's Operating Co, a subsidiary of Harrah'sEntertainment, has $1.4 billion in outstanding PIK togglenotes, paying 10.75 percent coupon, due in 2018, according toStandard & Poor's.</PRE>
"I imagine they will PIK that coupon," said Gregg Klein,high yield analyst at BNP Paribas in New York. "They are ahighly leveraged company, I think they're being conservativewith their cash."</PRE>
"(Harrah's) probably won't fail but this is a tough one,"Klein added. "Its probably fairly priced, if anything therecould be some more downside." </PRE>
