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Moody’s downgrades casino companies’ debt ratings

Moody’s Investors Service is continuing to downgrade casino companies’ debt ratings as concerns continue to mount about declining customer spending and visitor numbers.

The rating service today cut Harrah’s Entertainment’s probability of default rating and corporate family rating to Caa3, or “in poor standing,” from Caa1, or “substantial risk” of default.

The company also downgraded Fontainebleau Resorts today over concerns enough of the 1,018 condominium-hotel units won’t be sold to reduce the $2.4 billion in debt prior to opening.

“The downgrade reflects the high probability of default given the continuing decline in gaming demand across (Harrah’s) largest markets — Las Vegas and Atlantic City — that is eroding the company’s liquidity cushion,” Peggy Holloway, Moody’s vice president and senior credit officer, wrote in a note to investors about the Harrah’s downgrade.

Moody’s projects Harrah’s will generate negative cash flow for the next two years, which will leave the company struggling to pay the $700 million in bonds that will be maturing during that period.

The downgrade comes two weeks after Harrah’s requested to draw down the $740 million remaining on its $2 billion credit line, a move analysts said could presage a bankruptcy.

The company may seek to swap more of its debt load, Moody’s said. A debt exchange, however, would probably leave the company still highly leveraged and in risk of future defaults.

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

After that debt swap, Moody’s upgraded Harrah’s from Ca, or “extremely speculative,” but cautioned that the company’s capital structure “appears unsustainable unless gaming demand rebounds significantly.”

Harrah’s, which owns 50 casinos worldwide including eight on the Strip, is scheduled to release year-end earnings March 13.

Fontainebleau was downgraded to Caa3, or “in poor standing,” from Caa1, or “substantial risk,” of default.

“Visitation to Las Vegas and gaming demand in general continues to drop and is not likely to rebound to any significant degree in 2010,” Holloway said. “As a result of these adverse market conditions, peak construction debt will be materially higher than originally projected and earnings are likely to be substantially below initial expectations. Thus, the company’s ability to meet its debt service burden once the project opens is in jeopardy.”

Moody’s action comes a week after Standard & Poor’s Credit Rating Service also cut the project’s credit rating to “in poor standing.” S&P also expressed concern about the lack of condo sale, stating Fontainebleau “is unlikely to generate any meaningful levels of proceeds from condo sales over the intermediate term,” forcing the project to open with a considerably higher debt load than planned.

Construction continues at the Strip project north of the Riviera. It is scheduled to open in October.

The 3,815-room resort’s preview center opened in December, but only contact information is being taken from prospective buyers.

Moody’s said the unknown status of a funding gap for the retail amenity left by the collapse of Lehman Brothers is cause for concern.

“A failure to fund the retail loan could ultimately result in a default under the credit facilities supporting construction of Fontainebleau,” Holloway wrote.

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

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