July 2 (Bloomberg) -- Harrah's Entertainment Inc., the casino company bought by Apollo Management LP and TPG Inc., said it will pay the interest on $1.5 billion of loans and bonds with more debt, conserving cash as consumer spending drops.

The world's largest casino company will save about $80 million by making its February interest payments in kind, the Las Vegas-based company said today in a regulatory filing. The company chose to pay in kind as a ``method of conserving cash in a challenging economic environment,'' the statement said.

Harrah's is the fourth U.S. company taken private by Apollo to pay interest in debt. A total of nine companies have used the option on $4.1 billion of bonds. More may follow as the economy slows, Martin Fridson, chief executive officer of Fridson Investment Advisors in New York, said in a telephone interview.

``As more companies become strained financially they will have more of a need to use the non-cash option on their bonds,'' Fridson said.

Harrah's will use the savings for general purposes, including capital projects with high rates of return and the repurchase of debt to extend average maturities, according to the statement. Apollo and TPG paid $17.1 billion to take Harrah's private in January. Banks led by Citigroup Inc. financed the purchase with high-yield, high-risk loans and bonds.

Debt will be used to pay interest due in February on the company's toggle notes, Harrah's said today in a filing with the U.S. Securities and Exchange Commission. The $1.4 billion of 10- year 10.75 percent senior notes will pay in kind at 11.5 percent and will be the biggest toggle issue ever to use the debt option, according to data compiled by Bloomberg.

Notes Slump

Harrah's also said it will use debt for interest payments on an $100 million bridge loan, according to the e-mailed statement sent by Gary Thompson, a company spokesman.

``Harrah's currently has more than enough cash to service its obligations, and substantial capacity under a revolving- credit facility,'' according to the statement.

Since the LBO, Harrah's toggle notes have slumped to 73.9 cents on the dollar, yielding 12.3 percentage points more than benchmark Treasuries. A bond with a gap of more than 10 percentage points is considered distressed.

The debt dropped 3.75 cents since Lehman Brothers Holdings Inc. analyst Ashish Shah said on June 20 that Harrah's may choose to pay in kind, according to data compiled by Bloomberg.

Capital Research is the biggest holder of Harrah's bonds, according to regulatory filings.

Debt Burdens

Harrah's, with about $24 billion in long-term liabilities, is among debt-laden casino operators getting slammed by the slowing economy.

Las Vegas Strip casino revenue fell for the fourth straight month in April, the Nevada Gaming Control Board said last month. Consumers have limited spending amid the worst U.S. housing slump since the Great Depression, mounting unemployment and higher costs for food and gasoline.

Casinos in Las Vegas will lose more visitors and revenue because airlines are cutting flights to the city and increasing ticket prices to save on fuel costs, Moody's Investors Service said June 11.

KDP Investment Advisors Inc. today lowered its recommendation on Harrah's bonds to ``hold'' from ``buy'' on the news.

To contact the reporters on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net

Last Updated: July 2, 2008 18:29 EDT