Spreads on Harrah's Entertainment bonds are widening on expectations they will be downgraded below investment grade following the company's pending acquisition of Caesars Entertainment. Harrah's 5 3/8% notes of '13 were at a 155 basis point bid and widened to a 190bp bid mid-week. How the bonds trade going forward will depend on how Harrah's finances the acquisition, said one investor. "The question becomes, will Harrah's maintain close to investment-grade leverage?" said Tom Parker, portfolio manager at Barclays Global Investors.
If Harrah's does enter high-yield, 40-50% of the gaming sector will be tied up in the merged entity, noted one analyst. "With all of this consolidation, it will be harder for the sector to outperform," he added. Another analyst said if Harrah's does enter high-yield its impact on the sector's margins would certainly be negative.
Standard and Poor's revised the outlook on Harrah's triple-B minus rating from stable to negative on news of the acquisition. "We have lowered the rating to negative because its leverage is a little higher, but Harrah's is committed to its investment-grade rating," stated Michael Scerbo, analyst at S&P. He said there could be some challenges in merging the two companies but added he is comfortable with Harrah's track record for acquisitions.