Sin City reveals price of private equity’s vices
Private equity-owned companies are suffering a credit — and possibly credibility — discount.
Harrah’s Entertainment, the casino operator acquired three years ago for $27 billion by buyout firms TPG and Apollo, has outperformed publicly-listed rival MGM Mirage, and reduced leverage too. But Harrah’s is still considered riskier. The persistent skepticism may be a result of private equity’s track record of piling on debt and turning its back on troubled companies.
TPG and Apollo have kept Harrah’s in pretty good shape given the tough economy. Revenue fell 12 percent last year but aggressive cost cutting kept the operating profit margin flat. EBITDA fell in line with revenue — a rare feat in an industry where fixed costs are relatively high. Harrah’s also successfully restructured its debt. That helped push net debt-to-EBITDA down from a multiple of 10 at the end of 2008 to about 8.7.
Compare the performance to MGM Mirage. There, revenue has fallen by about 13 percent after netting out the effect of selling the Treasure Island hotel and casino. But EBITDA is down by a whopping 34 percent. As a result, debt that was once seven times EBITDA is now more than nine times.
The differences haven’t differentiated the Las Vegas denizens in the eyes of credit ratings agencies. Harrah’s is still considered riskier. Moody’s rates Harrah’s at Caa3 and MGM Mirage at Caa1, while Standard & Poor’s rates them the same. Investors also see Harrah’s as more likely to default. Its term loan was recently trading at 84 cents on the dollar, according to LSTA/LPC MTM Pricing. MGM’s senior debt was at 97.
This may have to do with private equity’s reputation catching up to it. Public companies tend to take a more balanced approach to raising money when they need it. Listed companies also have more ready access to raising cash. Buyout firms, of course, can inject more equity but also can — and often do — walk away more easily from troubled companies.
Harrah’s doesn’t seem like it will need new equity any time soon. It also isn’t in a position to gear up again. But Sin City may be exposing just how private equity is paying for past transgressions.