Harrah's will be organizing via bankruptcy soon according to this article. Excuse me while I shed a tear.
Casino Bonds Crush Harrah's as Recession Hurts Apollo (Update2)
By Caroline Salas
June 3 (Bloomberg) -- Casino bonds are generating the worst returns for investors as companies from Apollo Management LP's Harrah's Entertainment Inc. to Herbst Gaming Inc. risk bankruptcy under the weight of their debt.
High-yield, high-risk casino bonds, which returned 10 percent during the last recession in 2001, are the biggest losers this year, according to Bank of America Corp., as consumers get slammed by record gasoline prices and the worst
housing-market slump since the Great Depression. The debt has lost 4.4 percent, compared with junk bonds' average return of 1.4 percent.
Until the latest economic slowdown, casino bonds had gained a reputation for being recession-resistant, said
Bruce Monrad, who manages $1.2 billion of below investment-grade debt at Northeast Investment Management Inc. in Boston.
``It was very much viewed as a safe haven,'' Monrad said. ``If indeed the industry is less recession-proof than we were thinking, it would not have been a good time to lever up,'' as did Las Vegas-based Harrah's and Station Casinos Inc., he said.
Northeast owns bonds of
Trump Entertainment Resorts Inc., the Atlantic City, New Jersey-based gaming company led by
Donald Trump, which have lost 26 percent in the last year, data compiled by Bloomberg show. Monrad said he isn't interested in buying Harrah's or Station Casinos bonds because ``they just have too much debt.''
``Four-dollar-a-gallon gas prices are something that probably weren't completely anticipated a year ago,'' Monrad said.
Bankruptcy Filing
Herbst Gaming, operator of 8,400 slot machines in Nevada, stopped paying interest last month, Tropicana Entertainment LLC and Greektown Casino LLC filed for bankruptcy in May and bond prices show Harrah's and Station Casinos, which piled on more than $25 billion of combined debt in the past year to go private, are also at risk of default.
High oil prices and falling property values are curbing spending on gambling at a time when casino operators have committed to spend more than $10 billion through 2009, according to Deutsche Bank AG. They invested $7.8 billion last year.
The average high-yield casino bond returned 11 percent in 2000, 10 percent in 2001 and 14 percent in 2002, according to Merrill Lynch indexes. The average junk bond had a 5.1 percent drop in 2000, a 4.5 percent gain in 2001 and a 1.9 percent loss in 2002. High-yield, or junk, bonds are rated below Baa3 by Moody's Investors Service and below BBB- by Standard & Poor's.
`Most Leveraged'
Casinos took on a record debt load before the economy's latest slowdown.
Leon Black's Apollo, of New York, and Fort Worth, Texas-based TPG Inc. acquired Harrah's in a leveraged buyout in January for $27 billion. Station Casinos, owner of 12 Las Vegas-area properties, was taken over for $8.5 billion in November by its management and buyout firm Colony Capital LLC.
``This would probably be the most leveraged'' the gaming industry has ever been, said
Michael Paladino, an analyst at Fitch Ratings in New York. ``There's going to be an increase in defaults.''
Investors from
William Yung, who led Columbia Sussex Corp.'s purchase of Tropicana, to Capital Research & Management Co., the biggest Harrah's
bondholder, are being stung by losses.
Debt issued by a group of 10 of the biggest high-yield gaming companies from Las Vegas to Atlantic City and Connecticut will rise to a peak of 6.6 times cash flow this year from 6.5 times in 2007, Deutsche Bank predicts. The total debt for the group will increase to $47 billion from $45 billion.
Third Drop
Las Vegas Strip casino gambling revenue fell 4.8 percent to $517.5 million in March, the third consecutive monthly drop, according to the Nevada Gaming Control Board. In Atlantic City, the second-largest U.S. gambling center, casino revenue fell 6.7 percent this year through April after a 5.7 percent drop in 2007, the city's first decline.
Casino revenue may weaken more than in 2001, said Paladino. Nevada gaming revenue fell 3.7 percent in the 12 months ended June 30, 2002, according to the state
Gaming Control Board, as international gamblers stayed away from Las Vegas after the Sept. 11 terrorist attacks.
Consumer spending may shrink this quarter for the first time since 1991, according to economists at Goldman Sachs Group Inc., HSBC Holdings Plc, Morgan Stanley and UBS AG.
``The entertainment industries in general like to perpetuate the myth that they've never had a recession,'' said
Martin Fridson, chief executive officer of Fridson Investment Advisors in New York. ``With your typical, normal, non-pathological gambler is it really the case that they're going to go and make as frequent trips and spend as lavishly? I don't think so.''
`Long Way to Fall'
Fridson said gaming bonds have been overvalued by investors for years. Now, about 80 percent of speculative-grade casino bonds are ``cheap,'' meaning they offer attractive yields, his analysis shows.
``It had a long way to fall,'' Fridson said.
Tropicana filed for bankruptcy in May with $2.4 billion of debt, less than two years after its parent was bought by Crestview Hills, Kentucky-based Columbia Sussex for $2 billion. At the time of the merger agreement in 2006, Columbia Sussex's Yung said, ``In the down business cycle, the casinos don't really take a hit.''
Tropicana's $960 million of 9.625 percent notes due in 2014 have lost 12 percent this year, Bloomberg data show. Yung didn't return calls seeking comment.
`Going Concern'
Herbst Gaming's auditors at Deloitte & Touche LLP issued a ``going concern'' notice on the company's 2007 annual results, indicating the accountants believed the company might go broke. The Las Vegas-based company spent $500 million on purchases of the Sands Regent and three casinos in Primm, Nevada, leaving it saddled with debt just as anti-smoking laws went into effect.
Herbst's $160 million of 8.125 percent notes due in 2012 have lost 64 percent this year and are trading at 23 cents on the dollar to yield 71 percent, according to Bloomberg data.
Mary Beth Higgins, chief financial officer for Herbst Gaming, didn't return calls seeking comment.
Since the LBO, Harrah's $1.4 billion of 10.75 percent notes due in 2016 tumbled to 80 cents on the dollar to yield 14.7 percent, or 1,077 basis points more than Treasuries, according to Bloomberg data. The cost of protecting Harrah's bonds from default in the credit-default swaps market has almost doubled since the start of the year, Bloomberg data show.
Capital Research is the biggest holder of Harrah's bonds including the 2016 notes, according to regulatory filings.
Chuck Freadhoff, spokesman for Capital Research in Los Angeles, wouldn't comment on the firm's holdings.
Steven Anreder, spokesman for Apollo, declined to comment.
Jonathan Halkyard, CFO of
Harrah's, couldn't be reached for comment.
``I've been saying for years we're not recession-proof; we're recession-resistant,''
Frank Fahrenkopf, president and CEO of the American Gaming Association, said on a conference call last week. ``Spas, shopping, the shows, golf courses -- we're competing for that disposable dollar from consumers. Anything that hurts consumer spending is now going to hurt.''
To contact the reporter on this story:
Caroline Salas in New York at
csalas1@bloomberg.net.
Last Updated: June 3, 2008 11:32 EDT
