Harrah's offers 3 cents on the dollar for debt

[KenSmith]

What a deal, eh?
If you own $1000 in old Harrah's notes, they'll swap them out for $30 of new higher interest rate notes due in 2018.
Makes perfect sense from the company that advertised on a billboard for single deck blackjack with a "whopping" 6:5 payout.

http://www.cnbc.com/id/29518831

[Tarzan]

Did they mention it was a "whopping" $30? Perhaps then they could score a few more takers on this deal!

[callipygian]

Given a high enough interest rate, this could make sense. For example, if they offered a 10-year, $30 bond with a 50% interest rate with maturity in 2018, that'd be equivalent to a 10-year, $1000 bond at 5.6%. At such an high interest rate, there's very few people who would withdraw early, so it'd be effective at changing present debt to future debt.

[KenSmith]

Interesting idea.

[moo321]

Originally Posted by callipygian

Given a high enough interest rate, this could make sense. For example, if they offered a 10-year, $30 bond with a 50% interest rate with maturity in 2018, that'd be equivalent to a 10-year, $1000 bond at 5.6%. At such an high interest rate, there's very few people who would withdraw early, so it'd be effective at changing present debt to future debt.

It's harrah's. Those replacement notes are gonna be zero coupon, if you're lucky.

[mjbballar23]

Originally Posted by moo321

It's harrah's. Those replacement notes are gonna be zero coupon, if you're lucky.

Exactly my thinking as well

[callipygian]

Originally Posted by moo321

It's harrah's. Those replacement notes are gonna be zero coupon, if you're lucky.

This isn't a huge problem (for you, anyway). If you think Harrah's has a 2/3 chance of going under, then buy a $30 note at 60% interest, which will yield $3,300 if they don't go under and the EV has a premium of $100 over the original $1,000 for taking that chance. Remember that your $1,000 debt note is also worth $0 if they go Chapter 7, so the losses due to bankruptcy are the same whether you convert or not.

It might be a problem for Harrah's if they survive and have to pay out $3,300 in 2018 for every $1,000 of debt they currently owe, though.

As a matter of fact, how Harrah's sets the interest rate for the notes is probably a direct indicator of what they think the probability is of their company going under.