The problem is that this is worse than the worst-case scenario.
- An executive closely involved with the Harrah’s LBO on the worst case scenarios factored into their models at the time of the deal, quoted in “Harrah’s Changes Its Game: Tough Times For Gambling, Large Debt Force Shifts” (subscription required), The Wall Street Journal, October 27
On Monday, The Wall Street Journal had an interesting article on the Harrah’s LBO. Private equity shops TPG and Apollo took it private for $17 billion back in 2006. They piled on a bunch of debt to do the deal: Harrah’s has $24 billion in debt right now.
With the economy going down the tubes, Harrah’s casino properties are being badly squeezed. Harrah’s had about $1.5 billion in operating cash flows in 2006 and 2007 - when times were good. But Harrah’s only had about $12 billion in debt at the end of 2007 and $800 million in interest expense that year. Interest expense for the first half of 2008 was more than $900 million. That extra interest expense is going to eat up most of its operating cash flow and the slowing economy will likely eat up the rest.
The company is getting squeezed big time and this thing could go under.
Publicly traded casino operators MGM Grand (NYSE:MGM) and Las Vegas Sands (NYSE:LVS) are down 90% and 96% from their highs just one year ago! These things also look like they are already pricing in a severe recession - or even a depression. It suggests investors are worried they will even be able to survive.