Fitch Rates Harrah's Sr Unsec Notes 'BBB-'.

NEW YORK -- Fitch Ratings has assigned a rating of 'BBB-' to Harrah's Operating Company (Harrah's) proposed issuance of $750 million senior unsecured notes due in June 2015. Proceeds will be used to repay a portion of outstanding borrowings under the revolving credit facility and commercial paper program in advance of the proposed $9.4 billion acquisition of Caesars Entertainment ('BB+' with a Positive Rating Watch by Fitch), which is expected to close at the end of the second quarter 2005. The Rating Outlook is Stable.

Ratings reflect the company's large and diversified portfolio of casinos, significant cash flow generation, nationally recognized brands, good quality assets, geographic diversity, marketing/technical prowess, and financially conservative management team. Harrah's achieves strong same-store growth through its industry-leading Total Rewards loyalty program and capital investment in existing properties. Strong external growth has been achieved largely through strategic acquisitions, with numerous large-scale acquisitions successfully closed and integrated into the portfolio over the past five years, including Showboat, Inc. ($1 billion), Rio Hotel & Casino ($987 million), Players International ($439 million), Harvey's Casino Resorts ($712 million), and Horseshoe Gaming ($1.6 billion).

Ongoing risks include the potential for further run-up in leverage due to future acquisitions or development opportunities, potential regulatory changes and/or tax increases (particularly in riverboat jurisdictions), and competitive threats to Illinois, Atlantic City, and northern Nevada. With the addition of Caesar's, Harrah's exposure to Atlantic City increases at a time when the city is still absorbing the formidable competitive addition of the Borgata and also faces new competition from Pennsylvania and, potentially, New York over the next 24 months. As Harrah's largest acquisition to date, integration risks remain a key concern and, as Harrah's second large-scale acquisition in the past 12 months, synergies may be delayed.

Caesars Acquisition Update

The Caesars acquisition appears to be on track for closing in second-quarter 2005. Stockholders of both companies separately approved the merger on March 11, 2005. Harrah's has satisfied the FTC's requests for documentation and expects the FTC review to be completed shortly. On the state regulatory front, the transaction has been approved by Louisiana, Indiana, and Mississippi but still requires clearance from Nevada and New Jersey. Fitch believes that recent completion of the $1.2 billion sale of four Harrah's and Caesars properties (Harrah's East Chicago, Harrah's Tunica, the Atlantic City Hilton, and Bally's Tunica) to Colony Capital has alleviated a level of regulatory risk in completing the merger. In Indiana, the sale of Harrah's East Chicago allowed the combined entity to comply with the legal limit of two licenses. In Atlantic City and Tunica, the sales should lessen potential anti-trust concerns by reducing concentration.

Harrah's will initially finance the cash portion of the CZR acquisition ($1.9 billion) with borrowings under its revolving credit facility. Proceeds from the subject transaction (combined with Colony asset sales proceeds) will reduce outstanding borrowings under the existing $2.5 million to virtually nothing prior to closing. At closing, the revolver capacity will be upsized to $4 billion. Based on current projections, cash from operations combined with revolver availability and cash-on-hand appear adequate to support the company's growth initiatives, meet debt maturities, and pay dividends through at least year-end 2006.

Fitch expects Harrah's to end 2005 with pro forma leverage of approximately 4.5 times (x), versus actual 2004 leverage of 4.3x (which includes just six months of Horseshoe results). Heavy capital expenditure plans in the range of $1.0 billion should preclude significant debt reduction in 2005. However, an anticipated drop-off in spending 2006 and a full-year of CZR results should produce ample free cash flow for the company to delever to levels appropriate for the rating (below 4.0x) by the end of 2006. While closing leverage is high for the rating category, Fitch notes that this is consistent with Harrah's historical capital structure policies with rapid improvement in leverage following acquisition-related debt increases. Heavier-than-expected expansionary capex, share repurchase activity, or another acquisition could mark a shift in Harrah's conservative financial policy and could warrant revision of the rating or Outlook.

First-Quarter Results

Harrah's reported first-quarter 2005 EBITDA of $269.5 million, up 30.6% on a 24.2% increase in revenues to $1.26 billion. The year-over-year increases were primarily driven by the acquisition of Horseshoe Gaming and record results in the Western Region. On a same-store basis (excluding the three Horseshoe properties acquired on July 1, 2004), revenues increased 6.0%. EBITDA margins improved 150 bps, excluding a $4 million expense related to the CZR acquisition. Corporate expense was up 23.7% to $16.4 million due to higher incentive compensation for the quarter.

Strong performance in the Western Region primarily reflects continued strong demand on the Las Vegas Strip despite difficult year-over-year comparisons and effective hotel yield management. Central Region performance (excluding the Horseshoe properties) was also solid, with EBITDA up approximately 20% fuelled by a lower tax rate in Iowa, and expansion-driven gains in St. Louis and record-performance in New Orleans despite construction activity. Strength in this region was partially offset by weakness in Tunica and Bossier City. Atlantic City EBITDA improved 2.9% despite lower gaming volumes due to efficient marketing spending at the Showboat. Harrah's Atlantic City continues to be more directly affected by the opening of the Borgata in July 2003.