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Arnold M. Knightly


Harrah's buyers attempt 'creative' funding

13 Feb 2007

By Arnold M. Knightly

LAS VEGAS -- The private equity firms that are buying the world's largest gaming company plan to borrow against Harrah's Entertainment's land to help finance the $17.1 billion deal.

Apollo Management and Texas Pacific Group plan to break off some of Harrah's extensive land and property holdings into one or more companies to use as collateral to finance the acquisition, according to a Securities and Exchange Commission filing last week.

The land, which represents a third of the company's earnings, will be used to borrow $7.25 billion in a bond sale managed by JPMorgan Chase.

"It's still going to be on a consolidated level the same company," said Brian Gordon, a principal at Applied Analysis. "It's a creative way for the buyer to leverage the assets of each of those components of the business so they can leverage the land separately from the casino operations. It allows the overall leverage to potentially increase for the entire company."

The loans will have an initial term of two years with an option for three one-year extensions. The loan terms will begin with the closing of the purchase.

Although this type of financing, known as commercial mortgage-backed securities, is used in many large-scale commercial transactions, it is a new way of doing business in the gaming industry.

"It has been a way to purchase large real estate assets," said John Restrepo, a principal at Restrepo Consulting Group. "It's been done for many years in the office market, in the shopping center market, in the industrial market. There is a precedent for it, it's just a relatively new process for financing the purchase of assets on a casino-resort."

The equity companies will contribute $2.9 billion cash each for the equity contribution of the $17.1 billion purchase, with an additional assumption of approximately $10.7 billion in debt.

There has been conjecture that some of the holdings, such as the off-Strip Rio or properties in Louisiana or Iowa, could be sold to help pay down some of the purchase debt.

In the filing, Harrah's did not specify whether all the land in the company's portfolio would be borrowed against or if some would be set aside to make it easier to sell later.

Harrah's owns approximately 350 acres, both developed and undeveloped, in Las Vegas as well as holdings around the country and overseas.

Harrah's owns or manages 47 casinos worldwide, including Harrah's, Caesars Palace, Bally's, Flamingo, Paris Las Vegas, Imperial Palace and the Rio in Las Vegas.

Harrah's will soon acquire the Barbary Coast in a land swap deal with Boyd Gaming and will rename the property Bill's in honor of the company's founder, Bill Harrah.

One of the lingering questions about the pending deal is: What are Harrah's plans for future development?

With MGM Mirage's $7 billion Project CityCenter under construction and Boyd Gaming Corp.'s $4 billion Echelon Place in the pipeline, many industry experts believe any multimillion-dollar projects planned by Harrah's, such as its plans to develop a major center Strip resort project, will be put on hold while the sale goes through its regulatory hurdles.

Restrepo said this financial arrangement could free up the new owners to move forward with redevelopment once the deal closes.

A Harrah's representative declined to comment beyond the company's filing.

The Associated Press contributed to this report.

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