Take a good look at that fresh-faced man to the left. His name is Jonathan Halkyard and he’s the CFO of Harrah’s Entertainment. If he seems like a kid who’s running up a reckless tab on Dad’s credit card, blame it not on youth (he’s 45) but on a financial strategy that the Sun‘s Liz Benston and industry insiders describe in terms that include: “Byzantine,” “reckless,” “curious,” “risky,” “extremely opaque,” as well as, to be fair, “spectacular”. Halkyard’s Job #1 is to pay down — or find creative ways of avoiding paying down — $15 billion over the next nine years … plus whatever additional debt CEO Gary Loveman has managed to rack up in the interval.
So if you’ve been wondering where Harrah’s is getting the scratch to take on Planet Hollywood, possibly build an Ohio racino, expand into Rhode Island and even — if rumors are true — offer $600 million to buy James Packer out of Melco Crown Entertainment, it’s all a matter of Halkyard’s ledger-demain. As Benston explains, Harrah’s is meeting its debt schedules, “And yet, it has often paid bondholders millions less than they were owed. Some analysts call this a form of backing out on debts.” (S&G would call it something considerably less diplomatic.)
In other words, it’s easy to — as one Wall Street firm put it — be “manufacturing cash flow” if your modus operandi includes persuading bondholders to take a Yul Brynner haircut in the form of a dime-on-the-dollar buyback. Of course, if you’re creditor who signed off on that Faustian pact, it must be chagrining to see Loveman lard up Harrah’s with another half-billion in Planet Ho debt or read leaks that he’s supposedly flinging 600 mil at James Packer’s feet.
Perhaps had these bankers and bondholders not been meant to fleeced, the good Lord would not have made them sheep — but the shears have been working long and skillfully at One Harrah’s Court. And, unlike bankrupt colleagues Station Casinos and Herbst Gaming, nobody has uttered the “F” word (“fraudulent conveyance”) in connection with Harrah’s, even though the blue-sky projections that accompanied its LBO were nearly as hard to believe as Station’s. (Perhaps it’s because the price-to-cash-flow valuation of the Station deal was so preposterous, much more so than Harrah’s was, that the Loveman/Leon Black cock-up has drawn less opprobrium.) The company still remains overexposed in Atlantic City and Lake Tahoe (despite shuttering teeny-weeny Bill’s Casino up there) and has accrued so much Las Vegas Strip acreage it could take decades to recoup the investment.
For that matter, were they not secured by real estate (like perhaps the lovely, vacant Octavius Tower, above), we’d say new Harrah’s bonds are scarcely worth the paper on which they’ll be printed. And though they are secured, anybody underwriting Harrah’s management at this point had better have a high pain-tolerance threshold in their wallet. What’s the over/under on Halkyard announcing a postponement of the maturity on the new notes — or offering to buy them back at distressed rates? It’s worked for Harrah’s before.
Regarding his 2019 deadline, Halkyard says, “I like our chances that business will recover in that period.” Yes, and a stopped watch will be accurate 6,572 times during his timeframe. Saying the casino biz will recover by 2019 is like predicting the sun will rise tomorrow: There’s a chance you’ll be wrong but nobody’s taking odds against you. Still, he can afford a bit of swagger. Harrah’s has got the bond and banking sectors by the short hairs, and they don’t dare force the issue given their level of exposure.
Who’s too big to fail? Harrah’s, that’s who. For its financiers, bankruptcy is not an option. As Benston puts it, “Although top executives typically lose their jobs and ownership in a company in bankruptcy, the process can wipe the slate clean of debt, enabling it to compete more effectively.”
Sounds good to us.
