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September 2, 2014

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Harrah’s, General Growth hit with negative reports

Wall Street credit raters on Wednesday unleashed a flurry of negative reports involving Las Vegas, with Harrah's and General Growth Properties receiving much of the attention.

Earlier in the week, debt analysts at Wall Street investment houses said a debt-exchange program finalized last week by Harrah's that cut its debt by nearly $1.9 billion should help the casino-resort company avoid bankruptcy in the near-term -- but warned a restructuring will be necessary after that because Harrah's isn't generating enough cash flow to fully cover its obligations past 2010.

Their words were downright kind compared to what credit-rating agency Standard & Poors said Wednesday as it lowered Harrah's corporate credit rating from CC to SD (selective default).

"CC" indicates the issuer of debt is highly vulnerable to adverse business conditions. "SD'' means "an obligor has selectively defaulted on a specific issue or class of obligations but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner.''

"These rating actions follow the settlement of the company's below-par debt tender offer, which Standard & Poor's Ratings Services views as being tantamount to default given the distressed financial condition of the company,'' S&P said.

But the stigma of "selective default'' may only be temporary.

"We will continue to rate (Harrah's Entertainment and Harrah's Operating Co.) and expect to raise the corporate credit rating to 'CCC' with a negative outlook later this week," Standard & Poor's credit analyst Ben Bubeck said in a statement.

S&P's definition says: "An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.''

On top of the S&P action, Fitch Ratings issued a report saying more than half of the nation's upscale and luxury hotels with recently issued debt (2006-2007) may be unable to generate sufficient cash flow to cover their loan payments.

Decreasing consumer and corporate spending weakened the hotel sector in the first quarter, with the high-end segment most adversely affected, as room revenue has fallen more than 20 percent from the 2008 period, Managing Director Eric Rothfeld said in a statement.

"In previous hotel downturns, upscale and luxury hotels were able to sustain occupancy as customers upgraded to higher-quality brands to take advantage of reduced room rates," said Rothfeld. "Concessions are not having the same results during this economic recession, with many business accounts migrating to lower price points in the lodging segment to cut expenses and publicize a more frugal business plan to shareholders."

While the revenue declines raise the probability of default, they do not necessarily guarantee that will happen, he said.

"Experienced hotel managers may reduce variable operating and administrative expenses to maintain profitability, or seek additional capital to carry a hotel through a downturn," Rothfeld said.

Fitch noted room revenue at hotels with higher price points has declined by between 20 percent and 30 percent in the first quarter, according to preliminary data from Smith Travel Research, despite strong promotional efforts to boost performance following increased cancellations and fewer pre-bookings. Room revenue in the budget segment has fallen a more modest 12 percent to 13 percent.

"Many financial institutions have taken public steps recently to temper unwarranted travel expenses. In many cases, new internal mandates require employees to stay at hotels offering cheaper corporate rates. Meetings and conferences in leisure destinations have been canceled or rescheduled at different locations to reduce costs and provide a more traditional business environment,'' Fitch said.

"Las Vegas is a prime example of a market that caters to high-end group business with large catering budgets. According to the Las Vegas Convention and Visitors Authority, almost 30,000 room nights have already been canceled for 2009. Harrah's Entertainment reported a 30 percent decline in total revenue for January at its seven Las Vegas resorts,'' Fitch said.

Collateralized mortgage securities "backed by hotels located in Las Vegas or other high-end leisure destinations face a significant challenge in maintaining debt service," Rothfeld concluded.

Ouch.

Next in line for scrutiny was General Growth Properties, the subject of a Standard & Poors report issued just hours before General Growth filed for bankruptcy.

S&P said it had learned that a loan backed by the Grand Canal Shoppes at the Venetian resort was transferred to special servicing after General Growth, the mall owner, couldn't come to terms with servicer LNR Partners Inc. on an extension. This means General Growth is in danger of defaulting on the loan.

The balance on the loan, which matures May 1, is $393.7 million, S&P said.

"The sponsor (General Growth) has indicated that it is continuing to pursue various financing options,'' S&P said, adding the loan servicer reported the mall was fully occupied as of Sept. 30 with its largest tenant being the Tao restaurant and nightclub.

In an earlier report, Standard & Poors said that as of last fall the Grand Canal Shoppes was generating more than twice the cash flow needed to cover the mortgage payments.

General Growth has already defaulted on $900 million in loans for two other malls on the Strip, Fashion Show and the Shoppes at the Palazzo. General Growth has been trying to sell all three malls, but with the tight commercial credit market a deal involving one or more of the malls hasn't materialized.

General Growth -- ticker symbol GGP -- also owns the Boulevard and Meadows malls locally and is the developer of Summerlin. Hit hard by the recession and its hefty debt load, General Growth finally filed for bankruptcy early today New York time. The pressure increased this week when, according to the Wall Street Journal, a group of General Growth bondholders asked their trustee to sue for payment on their past-due bonds.

A Fitch Ratings headline noted last month: "GGP running on fumes on forbearances.''

As we've now seen, fumes will only get you so far.

***

In the good news, bad news category:

Simon Property Group -- owner of the Forum Shops at Caesars, the Las Vegas Premium Outlets and the Las Vegas Outlet Center -- will bring its usual team of executives and leasing agents to next month's annual International Council of Shopping Centers convention at the Las Vegas Convention Center.

But this year Simon, along with mall owner Westfield Group, doesn't plan to set up offices on the trade show floor, the Wall Street Journal reported.

It has "gotten expensive for us and our peer group," Simon Chief Executive David Simon said at an investment conference last month, the Journal reported. It pegged the convention cost for Simon at $2 million to $3 million for floor space, air travel and hotel rooms.

Those hotel rooms are sounding more and more useful to Simon, since it won't be deal-making on the show floor.

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