DEAL SETS THE TONE FOR CASINO BOND MARKET
Published: Thursday, November 17, 1994
Byline: By MIKE HUGHLETT Business writer
The money is in the bank.
After months of political wrangling. After weathering an ugly turn in the bond markets. Harrah's Jazz Co. Wednesday closed the sale of $435 million in junk bonds, the financial cornerstone of what's billed as the world's largest casino.
But while the deal is done, its effects will linger in the bond market. The issue, one of the casino industry's largest, should set the tone for other casino bond deals - particularly construction projects - over the next year, experts said at a gaming conference in New Orleans Wednesday.
Asbestos abatement begins Friday on the temporary casino, which will open at the Municipal Auditorium next spring. Monday, workers will begin removing asbestos from the Rivergate, site of the permanent casino slated to open in spring 1996.
"We're elated," said Ron Lenczycki, Harrah's Jazz's president.
The casino is expected to represent a total investment of $815 million. Its three partners will put in $170 million in equity (managing partner Harrah's is putting in 53 percent of that). A syndicate of banks led by Bankers Trust Co. of New York will lend $175 million. The bulk of the remaining money comes from the seven-year bonds. At least $150 million of those were snapped up by mutual funds of Fidelity Investments, the Boston-based mutual fund giant.
Harrah's Jazz paid a steep price for the bonds. They have a 14.25 percent coupon. Plus, bondholders get a "cash sweep": 7 1/4 percent of the casino's cash flow up to $350 million annually in cash flow. (Cash flow here is profits before interest, taxes and depreciation).
With that deal-sweetener, the bonds - at par - should yield at least 18 percent. They're yielding less now, because they're selling at 105 - five points above par (100). Bond yields fall as prices rise.
"This (bond issue) will set a new standard in the industry for high-yield," said Tom Libassi, senior vice president at Mitchell Hutchins Asset Management, which manages mutual funds for its parent firm, PaineWebber. "For the next 12 months, this will be the structure people will look at."
That was basically the consensus of a panel of financial executives Wednesday at The Riverboat Gaming Congress & Expo. The conference at the Ernest N. Morial Convention Center was put on by Gaming & Wagering Business magazine and Michael Jones and Co., a Chicago marketing firm specializing in gambling.
Until the junk market turns again to favor sellers, bond buyers will be looking for new deals with amenities such as cash sweeps.
Many casino junk bond deals over the past year have included warrants for bondholders to buy stock at a specific price. But that sweetener isn't as attractive in the wake of oversaturation in Mississippi.
At least four or five companies' bond issues there included warrants. But the companies' stocks are trading so low that the warrants aren't worth much now.
The Harrah's deal also marks a return to stricter covenants on bond deals, Libassi said. Covenants essentially are rules. And Libassi and others said the Harrah's Jazz deal has more detailed covenants on how bondholders' money will be spent.
The stricter covenants are in reaction to loosely structured Mississippi bond deals that went haywire in the wake of construction cost overruns.
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