Harrah's Debt Load Will Nearly Double

One of Harrah's trademark Mardi Gras clowns looks down from the entrance to Harrah's Hotel and Casino in a Las Vegas file photo from Aug. 2, 2005, on the Las Vegas Blvd. Casino operator Harrah's Entertainment Inc. reportedly is poised to accept a $16.7 billion, or $90 per share, sweetened offer from private-equity firms Apollo Management and Texas Pacific Group over an offer by casino operator Penn National Gaming Inc. (AP Photo/Joe Cavaretta, File) (Joe Cavaretta - AP)

LAS VEGAS -- Casino giant Harrah's Entertainment Inc.'s debt load will nearly double and its priority will shift to paying it down instead of reinvesting in growth after one of the biggest leveraged buyouts ever, according to SEC documents filed Wednesday.

Harrah's Chief Executive Gary Loveman told key employees that the company's debt would rise to $21 billion, or eight times operating profit, from the current multiple of 4.7, after being bought by Apollo Management Group and Texas Pacific Group, according to a presentation he made Tuesday after the deal was announced. Other Securities and Exchange Commission filings show Harrah's current debt is $10.7 billion.

Equity in the company will shrink from more than $14 billion to $7 billion, SEC documents show. One slide from Loveman's presentation was titled: "With high initial debt levels, capital allocation priorities will likely change."

Harrah's historical priorities show two check marks beside "reinvest for growth" and "mergers and acquisitions," but only one beside "share repurchases" and "reduce debt." Under the new structure, only one check mark goes toward reinvestment and acquisitions, while two appear beside reducing debt.

Loveman's presentation backs up some analysts' conclusions that the company's growth plans will take a back seat to debt repayment after it accepted a $17.1 billion buyout bid by the private equity firms.

Standard & Poor's Ratings Services on Wednesday lowered its ratings on Harrah's to "BB" from "BB+" to reflect the expected higher debt load. It left the company on credit watch for a further downgrade.

"The financial realities of being a moderately leveraged company to being a highly leveraged company is that there's just less financial flexibility on a capital spending front," said Susquehanna Financial Group analyst Robert LaFleur.

"You have competing uses for each dollar of free cash flow. You know, do you invest it in another project or do you use it to de-lever the company that you just levered up to financially execute this transaction?" he said.

Loveman told The Associated Press on Tuesday that he was "confident" that master plan redevelopments on the Las Vegas Strip and Atlantic City, N.J., would continue, and added there were no plans to sell off any properties.

Texas Pacific founding partner David Bonderman said the private equity pairing would be able to "help Harrah's deliver on its growth strategy" with a long-term perspective. Harrah's is pursuing projects in the Bahamas and Spain, SEC documents show.

Analyst David Katz with CIBC World Markets said property sales would need to be considered to reduce debt. The Rio casino-hotel in Las Vegas and Showboat in Atlantic City are prime sell-off candidates because they fall outside core brands Harrah's, Horseshoe, Bally's and Caesars, he said.

"The next issue for us is to figure out which properties they may or may not want to sell and how does the math pencil out?" he said.