US CREDIT-Harrah's risky as capex continues in weak economy

By Karen Brettell

NEW YORK, June 17 (Reuters) - Harrah's Entertainment Inc's
debt may weaken from already distressed levels as heavy capital
spending and interest payments absorb cash flows at a time when
the casino operator is also facing declining gambling
revenues.

And to conserve cash, Harrah's may exercise an option to
pay its pay-in-kind (PIK) toggle bonds with additional debt,
rather than cash payments, analysts said.

Harrah's in January completed a $17.3 billion buyout by
private equity firms Apollo Global Management LLC and TPG
Capital LP [TPG.UL], which was financed by more than $11
billion in debt.

"They pushed it to the limit in terms of leveraging up and
I feel its probably not getting any better," said Gimme Credit
analyst Kim Noland.

"Even though they throw up a lot of cash they've got
interest and maintenance capex that are going to eat up the
positive, and then they'll have to go negative to fund its
development capital spending," she said.

Noland estimates the company may draw as much as $1.7
billion from its revolving credit facility to fund its
spending, with the new debt ranking above its unsecured debt in
the capital structure.

The cost to insure Harrah's unsecured debt with credit
default swaps has jumped to an upfront cost of 21.5 percent, or
$2.15 million to insure $10 million in debt for five years, in
addition to annual payments of 500 basis points, according to
Markit Intraday.

Swaps trade upfront when the company is considered
distressed, typically when their spreads widen over 1000 basis
points. Harrah's swaps traded at 605 basis points at the
beginning of the year, according to Markit.

"Harrah's is a particularly challenging name because after
the LBO they have a lot of debt so people are pricing in a lot
of risk there," said Christopher Snow, analyst at CreditSights
in New York.

"People are concerned about the amount of supply that's
going to come to Las Vegas next year, they have a huge number
of rooms that are coming up that's going to challenge Harrah's
pricing power," Snow said.

Harrah's last month reported a drop in adjusted earnings
before interest, taxes, depreciation and amortization (EBITDA)
of 9.9 percent for the first quarter, to $454 million from $626
million in the year earlier period.

"People are trying to understand whether the market is
stabilizing at these levels and if the industry has just lost
the weakest gambler, or if the economy will continue to weaken
and you will see fewer people heading out to entertain
themselves at gaming tables," Snow said.

PIK DEBT

Amid a weakening economy Harrah's also has a number of debt
maturities coming due from 2010, making it likely that they
will choose to exercise an option on their payment-in-kind
notes to pay interest with debt, and conserve cash.

Harrah's is "pretty liquid through 2010, and that's when
people start to get less comfortable with the name," Snow said.
"They are looking at a pretty high wall of maturities starting
in 2010 and going through to 2011 and afterward."

Paying the PIK notes with new debt may be one way of
freeing up some liquidity.

Harrah's Operating Co, a subsidiary of Harrah's
Entertainment, has $1.4 billion in outstanding PIK toggle
notes, paying 10.75 percent coupon, due in 2018, according to
Standard & Poor's.

"I imagine they will PIK that coupon," said Gregg Klein,
high yield analyst at BNP Paribas in New York. "They are a
highly leveraged company, I think they're being conservative
with their cash."

"(Harrah's) probably won't fail but this is a tough one,"
Klein added. "Its probably fairly priced, if anything there
could be some more downside."