Fitch: Harrah's IDR Likely to Be Downgraded Given Planned Capital Structure.

NEW YORK -- Fitch Ratings may downgrade Harrah's Entertainment Inc.'s (HET) Issuer Default Rating (IDR) into the 'B' category from its current 'BB+' rating based on the planned capital structure for its leveraged buyout (LBO) by Apollo Management and Texas Pacific Group, which was outlined in its preliminary proxy statement (filed Feb. 8, 2006).

If the transaction is completed as planned, Fitch estimates that Harrah's total debt/EBITDA leverage could be in the 8.5 times (x)-9.0x range, while its EBITDA/interest expense coverage could be below 2.0x. The term loan could be levered around the 3.5x-4.0x range after adjusting for the commercial mortgage backed securities (CMBS) cash flow carve out and close to 60% of the company's pro forma debt will be secured. These credit metrics are inconsistent with Harrah's current 'BB+' IDR.

Despite the significantly weaker credit metrics, Harrah's long-term credit profile would still benefit from being the largest and most diversified casino operator with solid brands and excellent marketing ability.

Future Implications for Harrah's Ratings

The transaction still needs to clear a number of hurdles, the most significant of which are shareholder approval and regulatory hurdles, since the private equity firms will likely have to get licensed in every jurisdiction in which Harrah's operates. Therefore, Fitch will look to resolve the existing Rating Watch Negative and revise Harrah's ratings for the LBO transaction following milestones during the transaction process which demonstrate there is reasonable certainty that the transaction will close.

Since the transaction could close more than a year from now (though Harrah's anticipates it could close by the end of this year), there is a good possibility the parameters can change. The transaction aims to tap the bank, bond, and CMBS markets, the cost and accessibility of which can change swiftly. Also, it is unclear if there will be meaningful asset sales prior to or concurrent with the transaction. Fitch believes there are a number of properties in Harrah's portfolio that could be deemed 'non-core' and be potentially monetized to help fund the transaction. However, certain unidentified assets are going to be collateralized in the CMBS note, which could affect asset sale potential. Finally, competing bids could emerge while shareholders are considering this transaction.

Rating Context

Fitch downgraded Harrah's IDR to 'BB+' from 'BBB-' and placed Harrah's ratings on Rating Watch Negative following the Oct. 2, 2006 announcement of the receipt of the LBO proposal. At that time, the existence of the public bid changed Harrah's credit profile primarily because Fitch believed there was a high likelihood of a shareholder-friendly capital allocation decision that would have a negative impact on the credit profile (which was already weak investment grade) even if the transaction was not completed.

Transaction Detail

The planned $26.1 billion transaction has been approved by Harrah's board of directors and has received equity and debt commitments. The planned transaction will include:

--$5.87 billion equity contribution from the private equity firms;

--$7 billion senior secured 7-year term loan;

--$6.025 billion bond issue;

--$7.25 billion commercial mortgage-backed securities (CMBS) note.

In addition to the $7 billion term loan, the senior secured credit facilities will also include a $2 billion six-year revolver that is expected to be undrawn at closing.

If the $6.025 billion bond issue is not completed by the closing of the transaction, the lenders have agreed to provide a senior unsecured bridge facility until the bonds are issued.

The $7.25 billion CMBS loan could be upsized to $8 billion and will have a two-year initial term with options for three one-year extensions. If the CMBS deal cannot be completed by the closing of the transaction, the lenders have agreed to provide a senior secured real estate bridge facility. Certain unidentified real estate assets that account for roughly one-third of Harrah's LTM EBITDA will collateralize the CMBS note.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.