Moody’s is out today with a new report on Harrah’s, the casino giant taken private two years ago for $27 billion. And its conclusions are not good for Harrah’s owners Apollo Management and TPG Capital.
Instead, Moody’s virtually compares the pair — only identified as “management” — to degenerate gamblers. The company has enormous debts, but rarely takes the opportunity to pay them down. Instead, it keeps spending on new initiatives, hoping that the payouts will constitute salvation.
From the report:
Harrah’s management seems more interested in jump-starting growth initiatives than in reducing debt… In announcing the separate debt-for-equity investment with equity sponsors and a hedge fund, Harrah’s said the equity injection will be used for “further balance sheet optimization and strategic investments.” So it appears to us that Harrah’s will not use much of the expected equity investment to reduce debt.
Just to put Harrah’s leverage load into context, the company’s annual interest burden consumes a whopping 90% of property income. Overall, Harrah’s leverage is at around 10x EBITDA. To get the figure down to a (slightly) more managable 8x, the company would need to increase EBITDA by 40 percent. Tough for a gaming company to achieve in any economy, but particularly in this one.
So what to do? Moody’s lays out three options:
- Sell assets
- Go public
- Restructure existing debt.
The first one makes sense, but Harrah’s seems to disagree. In just the past year, it has acquired the Thistletown racetrack and the Planet Hollywood Resort & Casino (both of which added to the debt burden). Number three sounds great, except if you’re an existing bondholder (particularly a litigious one).
All of this leaves us with option #2: An initial public offering, with a promise that proceeds will be used to pay down debt. That last part is critical, since public market investors are unlikely to sign on as spending spree facilitators. Sure’s it’s a Hail Mary, but when you’re down by six with just a few seconds left on the clock…