Some gaming analysts see Paulson investment as good sign for Las Vegas

A few analysts are hailing hedge fund manager John Paulson's latest investment in the gaming industry as a sign of investor confidence in Las Vegas after months of malaise.

Others, however, were not so sure of that.

"Analysts are speculating when they say that the smart money has long-term faith in the gaming market," independent gaming analyst Frank Martin said. "The simpler scenario is also possible that Paulson made a good short-term investment. You simply do not know for sure without any insider knowledge."

Harrah's Entertainment announced Thursday that Paulson & Co. has agreed to exchange $710 million of the company's bonds for a 9.9 percent equity stake in the Las Vegas-based gaming giant.

The exchange includes $532 million in bonds Paulson & Co. will purchase from a Harrah's subsidiary for approximately 67 cents on the dollar.

Harrah's majority owners, private equity firms Apollo Management and TPG Capital, will swap $408 million in notes for an additional 5.7 percent of the company.

Paulson's investment comes nearly two weeks after the fund announced it had acquired 40 million shares of MGM Mirage and 4 million shares of Boyd Gaming Corp.

In an investors note, Steven Kent, a gaming analyst for Goldman Sachs Global Investment, called the Harrah's transaction "a strong indication that sophisticated investors believe in the recovery of Las Vegas and, more broadly, gaming."

Steven Wieczynski, vice president of gaming and leisure research for investment firm Stifel, Nicolaus & Co., said in a note to investors that private equity interest in gaming should start to accelerate with an improved economic environment.

Harrah's Chairman and Chief Executive Officer Gary Loveman also touted the investment as a sign of faith in the company's future.

The investment "reflects the strong and resilient performance" of the company, "particularly as it emerges from a difficult economic climate," he said in a statement.

Paulson's investment, however, received a mixed reaction from bond rating house Moody's Investors Service. The New York-based firm upgraded Harrah's liquidity rating and changed its outlook to "positive" from "negative." But Harrah's probability of default and corporate family rating remained at Caa3, or "in poor standing."

"The affirmation of (Harrah's) corporate family rating acknowledges the company's high leverage ... and significant near-term challenges," Moody's senior credit officer Peggy Holloway said in a note to investors. "These near-term challenges include a difficult operating environment for gaming and our expectation that it will take some time for gaming demand to reach its previous peaks."

Harrah's leverage, which is measured by a ratio of debt to cash flow, will remain over 10 times in the foreseeable future, Holloway said.

David G. Schwartz, director of the Center of Gaming Research at the University of Nevada, Las Vegas, said some analysts might be reading too much into Paulson's gaming investments.

"It shows one guy has confidence," Schwartz said. "But, obviously, if there is a seller, someone else doesn't have confidence. He believes in the upside but other people don't. It goes both ways."

Paulson made billions of dollars betting on the decline of subprime mortgage securities before the housing crisis. Paulson paid Goldman Sachs & Co. nearly $15 million to structure the deals in 2007.

The Securities and Exchange Commission in April sued Goldman Sachs for failing to disclose the conflict of interest to investors as it continued to sell mortgage investments in the housing market.

The SEC alleges Goldman misled investors by failing to disclose that Paulson played a role in selecting the mortgages and stood to profit from their decline in value. The commission has not pursued a case against Paulson.

The exchange will lower Harrah's debt load, which was $19.3 billion on March 31, and its interest expenses, Loveman said.

Harrah's will have nearly $3 billion in liquidity with nearly $1.5 billion in cash on hand when the transaction closes this year or in early 2011.

Contact reporter Arnold M. Knightly at aknightly@reviewjournal.com or 702-477-3893. The Associated Press contributed to this story.