Analyst predicts Harrah’s will land in bankruptcy court this year

A bond analyst said Thursday she doubts Harrah's Entertainment's latest debt swap offer will be successful and predicted the gaming company could end up in bankruptcy court before the year is out.

"We think this latest restructuring is an attempt to rearrange the deck chairs on the Titanic," Barbara Cappaert, a bond analyst with KDP Investment Advisors, said. "The company will very likely throw in the towel and reduce debt via a debt/equity restructuring (or bankruptcy) later this year to streamline its balance sheet."

Harrah's on Wednesday said it wanted to swap an unspecified amount of debt for $2.8 billion in lower value/ higher interest notes that would mature in nine years.

Harrah's owners, private equity firms Apollo Management and TPG Capital, are offering to exchange the notes issued in December for $250 million, or 37 cents on the dollar for notes tendered and accepted by April 17.

A price of 34 cents on the dollar would be accepted for notes tendered past the date.

Cappaert described the owners' offer as "curious," saying it could tilt a future bankruptcy in their favor.

"The investment ... would give Apollo ... control of up to $675 million face amount of the December issued debt," she wrote.

"This would represent one-third of those new bonds and that, interestingly enough, would be enough to block any restructuring plan in bankruptcy."

The debt exchange offer included giving as much as $150 million in cash to holders of second priority notes maturing in seven and nine years.

The offer expires midnight EST on April 1, however, a 3 cents on the dollar premium in new notes will be paid to investors who accept the offer before 5 p.m. EST on March 18.

Harrah's spokeswoman Jacqueline Peterson said the company is "in a quiet period" and would not comment beyond the release announcing the offer.

Cappaert, however, said she doubts the offer will get the response that Harrah's would like.

With the new debt likely to trade at the levels of the redeemed notes, Harrah's needs to offer investors a better package, she said.

Some investors holding priority bonds in the debt swap seemed to react positively to the news.

Harrah's near-term bonds climbed from between 241/2 cents on the dollar prior to the announcement to 32 cents on the dollar Thursday, according to the Financial Industry Regulatory Authority.

Bonds with lower priority remained stable, holding value as low as 6 cents on the dollar.

Harrah's on Thursday also released selected preliminary year-end financial numbers.

The company estimated cash flow of between $333 million and $347 million for the fourth quarter ended Dec. 31.

The results would equal at least a 12 percent drop from cash flow a year ago.

Revenues for the year are estimated between $10.08 billion and $10.2 billion, which would be a drop of at least a 6 percent from 2007.

The company was able to successfully reduce its $24.1 billion debt load by $1.16 billion through a debt exchange completed in January.

Contact reporter Arnold M. Knightly at aknightly@reviewjournal.com or 702-477-3893.