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Published Thursday, July 22, 2010 | 10:59 a.m.
Updated Thursday, July 22, 2010 | 5:48 p.m.
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Backed by investors with super-deep pockets, casino giant Harrah's Entertainment Inc. of Las Vegas has forged ahead during the recession with a growth strategy despite losing billions of dollars and carrying a hefty debt load of $22 billion.
Analyst Peggy Holloway at Moody's Investors Service and others at Moody's issued a report this week questioning the growth strategy and saying "Harrah’s significant debt service burden leaves the company with insufficient free cash flow for maintenance of existing assets or growth initiatives."
"Harrah’s will likely need to reduce debt by selling assets, going public or restructuring its debt burden. Restructuring would likely result in impairment to debt holder claims, and obstacles accompany all of these options," said Moody's report, noting Harrah's, like other casino operators, faces challenges in boosting revenue as "gaming demand isn’t likely to rebound or to reach previous peaks quickly."
Harrah's, with nine Las Vegas Strip-area properties such as Caesars Palace and Bally's, hasn't yet reported second quarter financial results. Through 2008, 2009 and the first quarter of 2010 it racked up $4.4 billion in losses, though much of that was on paper in the form of asset writedowns. The value of some Harrah's assets was written down because their ability to generate profits declined during the recession.
The losses would have been even higher, but Harrah's gained $5.7 billion during this period with financial engineering that resulted in the extinguishment of some debt, the replacement of some higher-cost debt with lower-cost debt and the extension of debt due dates.
Still, Moody's noted, Harrah's faces substantial annual interest costs of nearly $1.7 billion. Even though Harrah's has reduced its annual operating costs by hundreds of millions of dollars, that's a big number for a company with net revenue in 2009 of $8.9 billion.
Moody's says this means the company's debt payments consume about 90 percent of earnings before interest, taxes, depreciation and amortization generated at the property level, "leaving insufficient free cash flow for debt reduction or capital spending."
"We are also concerned that Harrah’s isn’t investing enough in its properties, which will hurt its competitive position over time. Additionally, management seems more interested in jump-starting growth initiatives than in reducing debt," Moody's report said.
Harrah's this year acquired Planet Hollywood on the Las Vegas Strip and has announced plans to acquire the Thistledown Race Track in Ohio.
Moody's, in highlighting Harrah's hefty interest expenses and expansion agenda, said in the new report: "Harrah's must address its significant debt burden."
Harrah's had no immediate comment on the Moody's report.
Also Thursday, Harrah's announced another possible expansion, this one in Kansas.
Harrah's submitted an application to the Kansas Lottery Commission for a proposed Harrah's casino resort in Mulvane, Sumner County, south of Wichita. Two other developers submitted competing proposals.
The Harrah's project would include a casino, multiple restaurants, a 100-room boutique hotel, a sports bar, food court, retail space and up to 15,000 square feet of entertainment and meeting space. Harrah's said that with sufficient land for future expansion, additional future amenities under consideration include a golf course, water park, RV park, spa, tennis facility, sporting clay facility and expansion of the hotel.
The cost of the proposed development wasn't immediately disclosed.
Investors in Harrah's include big Wall Street players with multibillion dollar portfolios.
They include Apollo Management LP, TPG Capital (Texas Pacific Group) and hedge fund player John Paulson. Harrah's executives and Paulson have been considering registering for public trading a minority share of the company's now privately-held stock.
A $710 million debt-for-equity deal with Paulson, announced June 3, was described by Bloomberg News as marking a "shift in efforts to salvage the company from debt restructuring and cost-cutting to equity capital and growth."
Paulson's Paulson & Co. appears to be bullish not just on Harrah's, but on Las Vegas and on gaming. Paulson has also recently purchased 40 million shares of MGM Resorts International and 4 million shares of Boyd Gaming Corp., becoming a big shareholder in both companies.
Since Harrah's is a private company, it would appear that no small fry (except employees if further cost-cutting is implemented) are involved.
The lenders lent to Harrah's with eyes wide open, and the major owners appear to be super sophisticated investors.
Although ordinary folk like me (the "small people" as BP called us) would certainly agree with Moody's assessment of Harrah's aggressive expansion as being foolhardy, the lenders and investors must be okay with it.
Time will tell if the Harrah's decision makers acted with brilliant prescience or fatal hubris.
Harrah's way too big on the strip with nine properties. And not investing in the properties to keep them up. I smell trouble ahead. Harrah's is not to big to fail.
Harrah's looks very unstable. It will be interesting to see what happens.
I wonder if I should get my deposit back for my January trip....
I would be very hesitant upon staying at a property with management that focuses more on expansion than improving the entertainment experience for their guests.
Harrah's debt is 22B? And Harrah's value? $7-10 Billion probably, after being worth $31 Billion in 2008 when they went private.
Their best plan now is a Fremont Street Knockoff on the Strip and Flamingo called LINK--and now moving into Wichita, Kansas. Brilliant!
@Sun (Mr. Green): How do you know John Paulson is bullish on Las Vegas? He could be making much larger side bets with his hedge funds. In addition, there are lots of signals about Harrah's changing its focus to Asia.
$22 billion in debt? Wow. Did not know it was that much.
Well, we know they are spending no money to fix up or improve the Flamingo, Harrah's or the IP, etc.
I love this quote from Moody's:
"Harrah's significant debt service burden leaves the company with insufficient free cash flow for maintenance of existing assets or growth initiatives."
That quote just sums up Harrah's perfectly. Translation: They are so in debt they can't expand and they can't fix up what they own. Nice.
Check out my LV blog:
http://jimmyhoofa-lv.blogspot.com/
"$22 billion in debt? Wow. Did not know it was that much."
Wow, the self proclaimed expert did not know something that has been in the news for years? ;-)
Harrah's is paying $4,700,000 million PER DAY IN INTEREST????????
(1.7 bill yr)
Talk about corporate idiots!!!!
This is why (dopes) pay $18.00 for a beer, $450 for a cabana ,etc.
Wow, I bet they still have people willing to loan them more $$$$
They need Terence Watanabe to help pay off this debt!
I haven't played at the Harrah's properties in years. No good videopoker and they rake 5 dollars off the pots in live poker. And the buffets are super charged. You gotta be crazy donate your money to this debt-machinery.
From Switzerland
Harrah's has got to come up with serious plan to reduce debt and yet at the same time keep up the properties they now have. Harrah's seems to be under the thinking of just run the place into the ground before putting in new paint, carpet, bedding, etc. They will loose in the long run with customers not wishing to stay there, but if the go to sell the property (i.e. "The Rio"). Nobody wants to buy The Rio cause not only is it locationally challenged, it is a dump and in desperate need of a major remodel to the interior. Good luck Gary, you seem to just be focussed on buying more and more with no regarded for debt on the books.
HARRAHS will wisely post remodeling and refurbishinhg projects on a small scale with great visibility while waiting out the second recession and waiting for the return of enough conservatives in congress to enact tax reform and control spending in Washington. This country will slowly become jobs and buisness friendly again after 2012.
I can get a discounted room for about $22 a night at the Imperial Palace. They just need a billion more people like me to stop by! (well, maybe 2 billion to cover operating costs too).
Possibly the worst managed gaming company ever, and all during Gary's watch. Gary Loveman has never been, nor will he ever be a gaming executive. As for the PE companies that "own" Harrah's, they aren't gaming operators either. And aren't that smart, remember, they kept Gary.
Harrah's paid $1 billion for the Rio, it never was, nor will it ever be worth that much. Its a $250 - $300 million property now, as it needs over $100 million in renovation.
Harrah's is not a developer, they acquire, and ruin. Look at Caesars now.
Hey Harrah's, just keep on having your mandatory two a day meeting's for floorman. Oh and keep on not paying them for the early meetings also. Absolute joke. This is why no one with any decent experience or common sense will ever work for your company. Looks like bankruptcy is imminent.
Boomer,don't forget the $40k a night pool-side mini-mansions @ Caesars!
Las Vegas grew to fast. Has way to many rooms for this economy. I see a down sizing, because there's no more money to up side.
gdperson: Las Vegas did not grow too fast... it grew too stupidly! There was absolutely no reason to constantly and persistently 'upscale' every darn service in the industry. Sure, it was okay for some owners to match Wynn when he built the Mirage; but EVERY hotel since then DID NOT require a "top-of-the-line" offering of gaming and related services. After all, we Americans are not all top-of-the-line social and economic beings (in fact, most of us ARE NOT!). So, why couldn't the Power Brokers give us the same services that got us to visit Vegas in the first place (like Stardust, the old Harrah's, the old Flamingo, etc.). Everything need not be Super upscale and priced beyond the means of 'middle America'.
No matter what, I yet manage my 2 or 3 visits per year to Vegas. But, I seek out the more moderate places... Gold Coast, Circus Circus, El Cortez, etc. I even dine at off-strip places 75% of the time. DON'T IMPLODE; REFURBISH THE OLD.
oh, moody's says it,well then it must be true. their analysis and a dime will get you a cup of coffee at most places now.
Whenever I enter Harrah^s on my way to the Mirage (which of course is the most convenient walk when it's hot outside), I consume airconditioned air and see the people desperately trying to win some money there. I can't even remember how many years it's since I've played there. I think it goes back into the days when they had this little poker room in the front. Don't see any reason why I should gamble there these days. The place smells like debt. And you can see it by simply checking the videopoker paytables and the overprized vendors at the outside of Harrah's. Looks like they're trying to make money for all it's worth and still missing the best opportunities there.
From Switzerland
I seem to remember the phrase: "Too big to fail."
I used to think that the reason there's not going to be a recovery is because people are in too much debt. They are trying to pay off their credit cards and getting into more huge debt in the form of student loans. Now I can see that there's another reason--companies are in too much debt. They have no money to hire people or improve their properties or expand into businesses that could generate profits.
Casinos did same thing regular people did. Spent like drunken sailors on the assumption that everything would keep going up up up. Now reality has smacked them (and the people) upside the head and all are in major debt with no way out other than bankruptcy.
People need to wake up and understand things are going to be alot different from now on and it aint going to be pretty.