Harrah’s chief financial officer dismisses talk about cash woes

The economic downturn is forcing Harrah’s Entertainment to cut costs and lay off workers, but the company’s chief financial officer Wednesday dismissed as "absurd" any speculation that the company is in greater financial peril than its Strip competitors because of its heavy debt load and falling revenues.

"Companies don’t go bankrupt because of earnings not meeting expectations but rather just (by) running out of cash," Jonathan Halkyard said. "It is our primary interest now in running this company that we don’t run out of cash."

Halkyard talked about the gaming company’s finances on the same day that Harrah’s Chairman and Chief Executive Officer Gary Loveman was in town for what company officials described as a regularly scheduled meeting with rank-and-file employees.

Jan Jones, Harrah’s senior vice president of communications and government relations, admitted Tuesday night that the backdrop for the employee meeting is different this year because of the state of the economy and the "massive layoffs" the company has announced in recent months.

Jones acknowledged hearing rumors for about a week about Harrah’s getting set to file for bankruptcy, but she called them "blatantly false."

Halkyard added Wednesday that, despite the current economic problems, the company is generating enough cash flow to meet its debt obligations.

"When we did the buyout in January, we put a lot of debt on the company," Halkyard said. "But we also provided for additional liquidity if we needed it."

Harrah’s Entertainment has $23.9 billion in debt split between two subsidiaries that were set up to finance the company’s $17.7 billion buyout by private equity firms TPG Capital and Apollo Management. The company’s 50 casinos in the United States and overseas generated $10.8 billion in revenue and $2.7 billion in cash flow for the past 12 months ending in June.

That is enough cash flow for the company to cover an estimated $1.4 billion interest payment on debt that comes due next year, as well as enough to complete a $1 billion expansion project at Caesars Palace and a $100 million maintenance program, while drawing down just a small fraction of a $2 billion credit facility, Halkyard said.

Halkyard described the $2 billion revolving credit facility as a "rainy day fund" that was set aside in case cash flow at the properties declined too far.

The CFO said Harrah’s has several other options available before it would need to tap too much of the credit facility should revenues fall too sharply.

For instance, he said, the company could sell some of its unused property in Las Vegas or Macau or even halt construction on the Caesars Palace project, which will cost the company $500 million in 2009 to complete.

"We would do anything we had to do not to burn through this," Halkyard said of the $2 billion credit line. "Everything we do around planning our capital expenditures for the next two years is to assure that if we have to, we can tap that revolving credit and not have to go to the banks."

Halkyard, however, described halting the Caesars Palace project or selling land as last resort measures that are not being discussed at this time.

"We wouldn’t hesitate for a minute to do that (though) if the alternative was to have to go out to our banks and ask for money for new loans or renegotiate existing loans," Halkyard said.

The company has been moving aggressively for several months because of the drop in consumer spending, especially among the gaming company’s mostly middle-income customer base.

"The company began taking measures in February to cut operating costs and capital expenditures to preserve cash in the economic downturn," according to Halkyard.

The company also could reduce the amount it is spending on renovations and maintenance if it becomes necessary to cut expenses further, Halkyard said.

Harrah’s, which has 87,000 employees worldwide, including 21,849 full-time noncorporate level employees in Las Vegas, has also been laying off employees and reducing hours to cut expenditures.

Jones, however, said the layoffs the company has had to make are no different than what other gaming companies are doing.

Wachovia Capital Markets bond analyst Dennis Farrell Jr., agreed that Harrah’s has no liquidity problems now and has several options to raise cash if the credit markets improve.

"They could do some exchanges on their debt which is now trading at a significant discount," Farrell said. "There is a significant amount of financial engineering the company could move forward with in the near term."

Halkyard, however, said if the company needed to go back to the banks to borrow or restructure its current loans, everything would have to be repriced at a higher cost than what the company now is due to pay.

Besides the $1.4 billion interest payment that is due next year, Harrah’s does not face any immediate bond payment requirements. A $375 million bond is due in March 2010, with a $750 million bond maturing in July 2010 and another $350 million coming due in May 2011.

Nearly $6.5 billion in commercial mortgage-backed securities will come due in 2013, and $8.25 billion in debt is due in 2015.

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

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