lthough some industry insiders and observers have had second thoughts about the wisdom of private equity's entry into the gaming industry, Gary Loveman isn't one of them. "(Being privately owned) provides an ability to focus on long-term viability and the health of the business," Loveman said. "(Apollo Management and TPG Capital) bring a lot of resources and a lot of expertise to the company that in a typical independent company setting you don't have."
Harrah's is one of two prominent gaming companies - Station Casinos is the other - taken over by private equity groups and larded with debt before the economy sank into recession more than a year ago. When hard times hit, casino companies saw revenues plunge as consumers cut back on spending, trips to Las Vegas and gambling. Firms such as Harrah's that had loaded up on debt to pay for aggressive expansion projects and buyouts were left struggling to make interest payments when the economy deteriorated.”
Harrah's has reduced its outstanding debt by approximately us$ 3 billion in the past year through a combination of debt-exchange offers. But Barbara Cappaert, a bond analyst with KDP Investment Advisors, recently wrote in a note to investors that Harrah's, which has more than us$ 600 million in debt maturing next year, is "not out of the woods."
Peggy Holloway, VP and senior credit officer for Moody's Investors Service, wrote last month that Harrah's may breach some of its debt covenants "within the next 12-month period unless operating results begin to improve from current levels."
Loveman, however, is confident Harrah's is well positioned to weather the economic storm through the next couple of years while his company and its private equity owners work through the company's nearly us$ 24 billion debt load. "We're very comfortable with our liquidity," Loveman said. "We have a position, with respect to our liquidity, that is quite comfortable (given) our upcoming debt retirements in 2010 and 2011."
Although Loveman would not discuss whether the company might have to eventually seek to restructure its debt in bankruptcy court, he said that analysts and financial experts "who scrutinize our public disclosures through the first quarter will be confident the stability of the company is significant."
Loveman insists that although the company's January 2008 takeover doubled Harrah's debt from us$ 12.4 billion, going private was still the right move for a company its size.
In fact, he said, being owned by "two deeply resourced partners" in the private equity industry is one of Harrah's biggest assets during the current economic crisis.
"They are deeply involved in the capital markets activities we're involved with," he said "They provide tremendous bandwidth and expertise to those activities on our behalf. They are really world-class in those areas and I lean on them extensively for counsel and advice and competence in those areas."
And despite the two private equity firms having seats on the gaming company's board, Loveman said the two firms aren't involved in the casino company's day-to-day operations.What TPG and Apollo have done is buy more than us$ 2 billion in Harrah's loans to fund cash-for-debt swaps earlier this year.
Because of TPG and Apollo's financial muscle, Loveman said Harrah's isn't at a disadvantage compared with publicly held gaming companies that raise cash through public offerings.
In mid-May, MGM Mirage announced its hopes to raise us$ 1 billion through a public stock offering. Wynn Resorts Ltd. and Las Vegas Sands Corp. have made similar moves in the past year.
Harrah's announced a similar plan last month to sell us$ 1 billion in new notes that will not mature until 2017 to raise cash to buy back more debt. "For us, the public market, at this point in our history, it doesn't bring much to us," Loveman said. "There hasn't been anything I've wanted to do that I've been unable to do because we're not a public company."
Loveman said the company also is not following its biggest competitor, MGM Mirage, by offering to sell any of its casinos or land holdings to help reduce debt. "In the case of MGM Mirage, a process was set up to market specific properties," Loveman said. "Banks were hired and materials were prepared and delivered to people who might consider participating. We haven't done anything of that sort. We have no explicit process, we have no advisers maintained to sell any of our assets."
Harrah's would, however, entertain offers if a buyer arrives with the ability to purchase an "asset we don't consider essential to our strategy." Loveman, however, said with the current credit markets, it's unlikely a legitimate buyer would be available.
While Loveman sees his company working its way through the downturn, he acknowledges that it is going to take "a little while" for Strip visitor and revenue levels to return to their record-breaking 2007 and early 2008 levels.
Free and independent travelers, lured by low room rates and airline fares, are still coming to Las Vegas, as are high-end players. The convention and exposition business, however, has suffered greatly, because of comments made by people he calls "leading political lights in the country."
President Barack Obama's admonition that companies that were receiving public bailout money shouldn't be spending money on trips to Las Vegas, made financial service and publicly traded companies "quite risk-averse" about choosing Las Vegas as a site for meetings, he said.
"The consequence of that loss of that demand is we're filling rooms that would otherwise be dedicated to those customers with a more value-oriented promotional market," Loveman said. "That is, to a large degree, why you can go online day and night and see these unbelievably attractive offers coming in from all of us to try to fill these rooms.
"That's the hole that has to get plugged," he said. "Then I think you will see the rest of the business firm up." He predicts it will be 2011 or 2012 before these institutions and companies feel comfortable enough to begin returning to Las Vegas in significant numbers. Loveman, who has been CEO for six years, acknowledges that the current economy presents one of his biggest challenges in his 11 years at the company. But, he said, it has also revitalized him.
"These last few months have been incredibly interesting, incredibly energizing, but at the same time very hard," he said. "You get up in the morning and, by and large, you face a series of problems all day long. Where as before, you faced some combination of problems and opportunities. You're doing a series of things that don't feel very good even though you know intellectually they're the right action to take. "It's taxing," he added. "Metaphorically, you feel like you're leaning into a headwind all day long, every day."