Harrah's Gets Some Debt Relief

Bondholders cut the giant's debt, hoping to avoid default later. Ford, GM, and others are hoping to cut similar deals with investors

Harrah's Entertainment is having a little luck. The wounded casino giant has persuaded bondholders to forgive some of its debt, twice now. In the latest deal, on Apr. 9, investors agreed to exchange $5.9 billion in loans for roughly $3.7 billion in cash and new debt, taking a 37% cut on their principal. The upshot for Harrah's: lower interest payments and a less onerous debt load. "This gives them breathing room," says Chris Snow, an analyst at research firm CreditSights.

Dozens of companies that binged on debt when credit was flowing like cocktails on a casino floor are begging lenders to take a hit, and some bondholders are agreeing. Companies exchanged $36 billion of debt for a lesser amount in 2008, according to credit rating agency Moody's (MCO). The total debt traded for new this year could top that number. Other highly leveraged private companies such as Freescale Semiconductor and Chrysler have or are renegotiating with investors. Public companies in troubled industries, including automakers Ford Motor (F) and General Motors (GM), are doing the same.

By cutting their debt, companies have a better chance of surviving the recession and emerging from this crisis as viable entities. "They're buying an option, hoping the economy will recover," says Jason W. Reese, CEO of investment firm Imperial Capital.

Bondholders are betting that it's better to take a haircut today than risk a company filing for Chapter 11 later. When borrowers go bust, the creditors are less likely to recoup their money. In bankruptcy, bondholders typically recover 5 cents to 42 cents on the dollar. "It's a game of chicken," says Jason A. Bauer, an analyst at investment firm T. Rowe Price, which participated in the first Harrah's debt exchange. "If it goes into bankruptcy, your return could be zero."

Buyout giants TPG and Apollo Global Management took Harrah's private for $30 billion back in January 2008, one of the largest private equity deals ever made. The company's debt load doubled as a result, leaving Harrah's with an interest bill of $2.1 billion a year just as America's love affair with gambling began to fade.

Now, CEO Gary W. Loveman is slashing costs to conserve cash. He halted construction on the Margaritaville Casino in Tunica, Miss., and postponed a plan to rename the company Caesars Entertainment.

Still, the casino chain faces major uncertainties. The cost-cutting, for example, may alienate customers. To save money Harrah's reduced the number of cashier windows where players exchange chips and replaced them with machines. Dealers at Harrah's, whose hours and benefits are being cut, took out ads criticizing the CEO's $39 million pay. Says a Harrah's spokesman: "We are confident the steps we've taken won't affect the long-term success of our business."

Harrah's may have history on its side. A University of Chicago study found that highly leveraged companies that ran into trouble after the last buyout boom in the late 1980s, including RJR Nabisco, did well after cutting their debt. Says Joshua Lerner, a professor at Harvard Business School: "When you look at these firms three or four years later, there is little harm."

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