Harrah's brings $6 billion deal, but bonds dive in secondary; builders mixed in indecisive junk market

By Paul Deckelman and Paul A. Harris

New York, Jan. 25 - Harrah's Entertainment Inc. finally brought a long-awaited, multi-billion dollar mega-deal to market Monday - but once the Las Vegas-based casino operator's new paper went into the secondary arena it fell sharply. The company's outstanding bonds meantime headed lower as well on supply concerns.

The Harrah's deal was the only real feature in an otherwise largely becalmed and slightly befuddled market, with participants waiting to see what happens at the Tuesday-to-Wednesday meeting of the Federal Reserve's policy committee, although most expectations call for a 50 bps easing of key interest rates.

Housing bonds such as KB Home, Hovnanian Enterprises and Standard Pacific Corp. were all seen either unchanged or mixed. So were mortgage originators like Countrywide Financial Corp. and Residential Capital LLC.

Cash bonds saw a late day rally in conjunction with stock prices, according to a buy-side source, who marked junk up half a point to a point.

Meanwhile in the primary market, the first significant development of the new year with respect to the LBO risk overhang unfolded as Harrah's Entertainment priced a downsized $6.335 billion amount of senior notes.

The deal may have been a shot in the arm for 2008's heretofore anemic issuance total - just $850 million heading into Monday - but market sources told Prospect News that it may bear ill tidings for the orderly offloading of the LBO risk.

Harrah's prices

Harrah's Entertainment priced a downsized $6.335 billion amount of senior notes (B3/B-) in two tranches on Monday.

The bond terms were circulated through the market on Monday morning around the same time that sponsors Apollo Management LP and TPG Inc. announced that they had closed the $17.1 billion LBO of Las Vegas-based Harrah's.

The bond sale included approximately $4.9 billion of eight-year senior cash-pay notes which were priced at par to yield 10¾%. The tranche was downsized from $5.275 billion.

Also included was an approximately $1.4 billion tranche of 10-year PIK toggle notes which were also priced at par to yield 10¾%. The toggle notes' coupon steps up 75 basis points if the coupon is paid in kind. The toggle notes tranche was downsized from $1.5 billion.

Citigroup, Deutsche Bank Securities, Banc of America Securities LLC, Credit Suisse, JPMorgan and Merrill Lynch were the underwriters for the bond deal, which was downsized from $6.775 billion.

Shortly after the bonds were priced a hedge fund manager told Prospect News that the cash-pay notes were at 88½ bid, 89½ offered.

At the close sources from both the buy-side and the sell-side saw them at 89¾ bid, 90¾ offered. A buy-sider said that the entire market rallied late, with equities.

A little disarray

Two sources, one from the buy-side and one from the sell-side, suggested to Prospect News on Monday that recent developments the Harrah's debt financing, which also includes a $9.25 billion credit facility, might signal the terminus of the unified front underwriters pledged back when the LBO risk overhang first took shape in the late summer and early fall of 2007.

A sell-side source, not in the deal, recounted that underwriters had syndicated 25% to 30% of the Harrah's bridge loan back in February 2007.

The remaining 70% to 75%, therefore, remains on the underwriters' balance sheets, the source added.

"You have some liquidity in the notes," the sell-sider said.

"But there is much more being held by the underwriters than by investors."

Aside from the notes, sources have been telling Prospect News that a $3 billion tranche of Harrah's Libor plus 300 basis points term loan, which underwriters have been marketing at 96.50, appears dead in the water.

Last Friday a portfolio manager who focuses on both the high yield bond and leveraged loan markets painted the scenario: the good news is that people like the company, the source said. The bad news is that people don't like the structure of the loan and it's a tough market.

On Monday two sources told Prospect News that the market had been buzzing all day with word that at least one investment bank in the Harrah's syndicate sold down its term loan portion.

A sell-side source, not in the deal, said that with respect to the LBO backlog, up to now underwriters have been disciplined.

"Syndicates had been working together," the source said. "You really didn't see the situation where it became a free for all among the underwriters on moving risk.

"This is the first time we've seen that," the sell-sider added, remarking that bids which, in late 2007, underwriters sniffed at, now might start to be hit.

This source recalled that in the fall of 2007 underwriters grappling with what was then a total amount of $9 billion of First Data Corp. high yield risk were "more or less locked together, with one goal."

Prospect News asked this source whether the Harrah's deal represents the first serious breach in that unity.

"Yes," the sell-sider responded.

"This seems more as if everyone's heading for the gates.

"It's a bad sign."

New Harrah's bonds nosedive

When the new Harrah's 10¾% notes due 2016 and PIK 10¾% notes due 2018 were freed for secondary dealings, market participants noted a sharp slide - down to levels as low as the 88-89 area.

A trader said that from what he saw, "it's weird - nobody's quoting it [the new deal]."

Noting the difficulty Harrah's had in even getting such a large deal done - the first really big deal of 2008, he opined that he had "actually heard that the deal was going to be pulled." It obviously wasn't, but traded as though it might have been - or should have been.

"It's pretty unbelievable that they can be priced at par and be at 88-89," he continued. "The people on that deal are having a little problem, aren't they?

A trader at another shop said that the new PIK bonds "came at 97. There were some first prints on the 2018s as low as 86 or 87. It closed at 90 bid, 91 offered."

Existing Harrah's bonds also lower

With such a giant-sized chunk of new Harrah's paper coming onto the market, the company's existing bonds, understandably, were taken lower. A market source saw the outstanding Harrah's Operating 5 ¾% notes due 2017 lose a point to end at 59.5 bid,

Meanwhile, according to another source, its 6½% notes due 2016 plunged 2¼ points to about the 64 level.

Elsewhere among the gaming names, Trump Entertainment Resorts Inc.'s 8½% notes due 2015 - which had firmed smartly to above the 72 level over several sessions last week - gave back some of those gains on Monday, first bid at 70, but ultimately left going home at 69.5 bid, 70.5 offered.

Market indicators steady

A trader saw the widely followed CDX junk bond performance index off 1/8 point on the session at 91 3/8 bid, 91 5/8 offered. The KDP High Yield Daily Index was unchanged From Friday at 75.61, while its yield was steady at 9.18%. In the broader market, advancing issues led decliners by a very small margin, with Monday's volume reduced from Friday's.

Perhaps it was the usual Monday lassitude, wariness ahead of president Bush's final State of the Union address on Monday night, in which the president was expected to speak at length about his plans for the economy, the Federal Reserve Board being scheduled to meet this week and expected to cut interest rates again to calm jittery financial markets, or just a desire on the part of market participants to hug the sidelines until they get a clearer picture on what's happening with the economy, but traders said that junk bond market participation Monday, and activity in junk's distressed corner, was muted and inconclusive, on reduced volume levels from Friday's dealings.

"Not much was going on," said a trader. "It was very, very, very quiet." Cash bonds, he said, were "almost untraded."

Housing, mortgage bonds mixed

An example of the market's indecision was the behavior of homebuilder bonds - despite clearly negative news about the levels of new home sales last month.

A trader said that despite those sour statistics, he saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 up a point on the session at 74.5 bid, 75.5 offered, while Standard Pacific Corp.'s 7% notes due 2015 were unchanged on the day at 66 bid, 68 offered.

However, a market source at another desk saw Hovnanian's 6 3/8% notes due 2014 down a point at 67, although its badly beaten down 8 7/8% notes due 2012 firmed by a point to 48. Another trader saw Hovnanian's 7½% notes due 2016 at 68 bid, 70 offered, while its 6½% notes were at 68 bid, 70 offered.

A trader quoted KB Home's 6 3/8% notes due 2011 little changed at 95 bid, and said that he [had not] "seen any two-sided markets."

William Lyon Homes Inc.'s 10¾% notes due 2013 gained more than a point to about the 56 level.

The government reported that December new home sales unexpectedly came in at a seasonally adjusted annual rate of 604,000 units, down 4.7% from the 634,000 unit pace seen in November - and 40.7% less than the year-ago number. The December figure was the lowest in 12 years. Meanwhile, the November figure was revised downward from the originally reported 647,000 unit pace - and Wall Street had been looking for a number in the 640,000 to 647,000 range.

The Commerce Department also said that the median sales price of a new house in December was $219,200 - a 10.9% price drop year-over-year, the largest decline in nearly four decades. At the current sales rate, there is a 9.6 month supply of new homes. In 2007, there were an estimated 774,000 new homes sold, down 26.4% from 2006.

Closely tied with the homebuilders, traders likewise saw a mixed bag among the mortgage originators. A trader saw Countrywide Financial's 3¼% notes slated to come due in May at 96.5 bid, 97.5 offered, and its 6¼% notes due 2016 likewise steady at 82.5 bid, 84.5 offered. Residential Capital's 6½% notes due 2015 were unchanged at 61 bid, 63 offered, while Thornburg Mortgage Inc.'s 8% notes eased to 84 bid, 86 offered.

At another desk, a trader called the Countrywide bonds down a point to 95.5 bid. 96.5 offered for the '08 bonds and to 81 bid, 83 offered for the '16s.

Also in the financial sphere, a trader saw bond insurer MBIA Inc.'s 14% surplus notes due 2032 - which have gyrated wildly since the Jan. 11 par pricing, falling at one point to as low as 70 before bouncing back to the around the mid 90s, were quoted unchanged at 93 bid, 94 offered.

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