Harrah's says will repay interest with new debt

NEW YORK, July 2 (Reuters) - Harrah's Entertainment Inc, the world's largest casino operator, on Wednesday said it will pay the interest on some of its bonds with additional debt.

The option to pay interest with debt is available to companies that sold pay-in-kind (PIK) toggle bonds when bondholders were lending money to junk-rated companies on easier terms before the credit crunch hit.

Harrah's, which was taken private in a leveraged buyout earlier this year, said in a regulatory filing it will pay interest on its PIK toggle bonds due in February 2009 with new debt and use the cash savings for general corporate purposes.

Harrah's also said it will pay in cash interest due in February on its senior unsecured loan, adding it is "evaluating opportunities to retire other of its debt instruments in order to take advantage of current debt market conditions and thereby extend the weighted average maturity of its capital structure."

The company will save nearly $100 million by paying the interest on its PIK notes with new debt, Barbara Cappaert, analyst at KDP Investment Advisors said in a report on Wednesday.

"What is more curious, if not troubling, is the reference to retiring debt taking advantage of current market conditions," she said.

It is possible that Harrah's will use the cash savings toward retiring $1.2 billion of debt that comes due in 2010, she said. Alternatively, the company could commence a debt exchange offer to extend its debt maturities, possibly offering below the existing debt's par value, she added. (Reporting by Karen Brettell; editing by Gary Crosse)