RLPC-UPDATE 2-Harrah's $9 bln loan sale expected soon -sources
(Recasts throughout. Adds background, details, bylines.)
By Smita Madhur and Dena Aubin
NEW YORK, Jan 8 (Reuters) - A $9 billion loan sale by Harrah's Entertainment could mark a crucial test of investor appetite for takeover-related debt as bankers try to clear a $150 billion leveraged loan pipeline, according to Reuters Loan Pricing Corp.
Harrah's HET.N, the world's biggest casino operator, is expected to begin selling the debt soon to help back its $27.8 billion buyout by Apollo Management and Texas Pacific Group, sources told Reuters LPC on Tuesday.
One of the first large LBO-related loans to be marketed this year, the bank loan consists of a $2 billion, six-year revolver and a $7 billion, seven-year term loan.
Harrah's would be a good choice to kick off the 2008 LBO financing calendar because it is one of the better casino operators in the business and has an extensive line of gaming properties, Citigroup high-yield strategist John Fenn wrote in a report on Friday.
"We actually believe the market is ready for deals and are certain that the reverse inquiry process is in full swing," Fenn wrote.
Reverse inquiries, or interest expressed by one or a handful of large investors, accounted for significant demand for some of last year's large LBO financings.
HIGH-YIELD BONDS EXPECTED
Harrah's LBO financing also includes up to $6.025 billion in senior unsecured bridge loans from Citigroup and Deutsche Bank, Harrah's said in a filing last February. Those bridge, or temporary loans, are expected to be replaced with high-yield bonds.
At the time of the filing, the company also said additional debt financing would come from $7.25 billion in commercial mortgage-backed security loans led by J.P. Morgan.
It was not clear at press time, however, whether those loans would now make it into the capital structure, given the deterioration in the credit markets over the past six months.
Sponsors Apollo Management and Texas Pacific Group had agreed to contribute $2.9355 billion each in equity, according to the filing.
The leveraged loan market has been trying to recover its footing since negative news on subprime mortgage fallout, high oil prices and inflation undermined sentiment late last year, according to Reuters LPC.
Alltel, one of the last companies to attempt a jumbo LBO loan, in November had to downsize it from a planned $6 billion to $3.2 billion in size and offer steeper discounts than first planned.
OPTIONS INDICATE DEBT SALE WORRIES
Activity in the U.S. options market on Tuesday reflected speculation by some investors that Harrah's debt may be difficult to sell, said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.
Investors were positioning for Harrah's shares to fall by buying puts, which give them the right to sell the company's shares at a preset price and time.
Specifically, some investors were buying January puts allowing them to sell Harrah's shares at $75, $80 and $85 apiece, far below the shares' current trading level of $88.31.
The buying indicates "there is some speculation that the deal will break, and as a result the stock will drop dramatically," Lefkowitz said.
A sell-off in the markets on Tuesday will make the loan sale even more challenging, said Andrew Feltus, portfolio manager for Pioneer Investments.
"With the market getting pummeled here again, it will be interesting to see how much they (bankers) are willing to pay to get it off their books," Feltus said. "It's a new year but it's the same story."
High-yield bonds fell and the Dow Jones industrial average tumbled 238 points to 12,589 on Tuesday after AT&T (T.N) warned of soft consumer spending and Countrywide Financial's CFC.N shares plummeted on worries about its financial health.
Bankers this summer were left holding more than $350 billion of bonds and loans they had committed for LBO financings after a global credit squeeze dried up investor appetite for the debt. Banks typically commit to provide financing for LBO deals, hoping to sell it in the capital markets for a fee.
The amount of unsold LBO debt was whittled down after bankers sold some of it at a loss and after a handful of buyout deals were canceled.
Banks are eager to clear the rest so they can free their balance sheets for new deals, said Brett Barragate, a Jones Day attorney who represents banks involved in LBOs.
"As long as they have those loans that have yet to be syndicated, it makes it very difficult for them to go out and do new deals because they don't know the extent of losses they're going to take on the old ones," he said. (Additional reporting by Doris Frankel in Chicago; Editing by Leslie Adler)
