EDITOR'S LETTER: The shark lives
Big picture thinking at Harrah’s Entertainment has always been marked by a level of creativity that belies its corporate girth. This multijurisdictional giant, the pioneer of the great American gambling chain store, is out there with Icahn, Ruffin and Yemenidjian, playing the distressed asset game, mixing it up with Penn National and Pinnacle in Ohio, grabbing a chunk of a wobbling Planet Hollywood on the cheap, moving boldly to leverage powerful brands like World Series of Poker and Caesars (and Total Rewards, we expect) in the Web gambling space.
Money is like a shark, it has to move or it dies. Tab back to about this time last year, after the mortgage debt bomb exploded and Lehman went down, triggering panic in the money market funds. For a moment there the shark looked to be breathing its last. But it was only a near-death experience, thanks to a swift and massive public rescue. Things are still very tenuous, as we know. There is in the United States about $1 trillion in bonds and bank debt coming due over the next six years. Residential and commercial real estate are in the crapper, the dollar is shaky, the national unemployment rate is headed for double digits and consumers are tapped out.
Yet through the first nine months of this year investors plowed more than $25 billion into high-yield mutual funds, according to a recent report in The New York Times. The market for junk paper is up 45 percent. Nearly 90 percent of it has gone to refinancing existing corporate debt, so it’s not like a lot of new money is entering the system. But basically Wall Street is saying forget the “real” economy. Those worst-case scenarios that were so frighteningly imminent last fall are behind us, or so it appears, and if they’re not, the taxpayers will be there to pick up the pieces. Money is even cheaper now than it was under Greenspan. The specter of deflation has been banished. The fire is back in the bellies of the union busters. So who can’t see that the all-clear has been raised to get mavericky again? Relief has given way to the nitty-gritty of profiting from the debt that nearly buried us. A trillion dollars? That’s some bodacious churn.
The concerns raised by this new appetite for risk notwithstanding, the shark’s primordial drive toward open water does make it possible for troubled companies like Harrah’s to score.
Casino stocks are up over 400 percent from March, sharing in part in the current bull market and trading on belief in Macau and Singapore and on regional growth in the States. That majors like MGM Mirage, Las Vegas Sands and Harrah’s have been able to stave off bankruptcy has shored up confidence. And with share prices still about 80 percent below last year’s highs there is a perception of considerable upside. Between the beginning of May and the middle of September, casino operators managed to sell more than $5.4 billion of high-yield debt, according to the Financial Times. Only three of those issues involved Las Vegas or Atlantic City. And it’s true that terms have changed since the salad days of 2006 and 2007. Lenders want collateral. Seventy-five percent of that $5.4 billion is secured. Interest rates are steep. But with higher average yields and returns that are outperforming broader indexes chances are good that as investors continue to repay themselves more churn money will find its way to the sector. This is buying operators critical time to repair balance sheets, diversify out of soft markets, pursue new revenue streams in existing and emerging markets and hunt down bargains.
Harrah’s, as usual, is out in front. Partly through refinancings, and despite an almost unconscionable debt load ($19.3 billion), interestingly enough, the company has no large obligations coming due for several years. These days, that is a very strong position to occupy.