Is Harrah’s in a Hurry to Exchange Debt?

A new tax deferral written into the stimulus bill will likely affect Harrah's recently announced bond exchange, and prod the company to complete its debt swap sooner than later.

Bob Willens 2

Faced with the potential prospect of defaulting on final bond payments, some struggling companies will choose to exchange notes that have fast-approaching due dates and swap them for new bonds that have extended maturity dates. In many cases, the move is aimed at buying more time for companies that are working to restructure debt loads.

Interestingly, such debt exchanges may be helped by a tax deferral that is part of the recently enacted stimulus legislation. The debt swap announced by Harrah’s Entertainment Inc. earlier this month is one example of how the new legislation — which reportedly Harrah’s lobbied for — may put a positive spin on tax implications.

In the deal, Harrah’s would make a swap with is wholly-owned subsidiary Harrah’s Operating Company Inc. (HOC). Specifically, HOC plans to issue up to $2.8 billion (in aggregate principal amount) of new 10 percent second-priority senior secured notes, due 2018, in exchange for a substantial amount of its existing debt, the aggregate principal amount of which appears to exceed $10 billion.


When bonds are repurchased in exchange for new debt instruments, the first order of business is to determine whether income from cancellation of debt (COD income) will be realized as a result of the exchange. To do that, companies should look to Section 108(e)(10) of the tax code.

That section states that if a company issues a new bond – or any debt instrument for that matter – to pay off existing debt, the company is treated as having satisfied the indebtedness with an amount of money equal to the issue price of the instrument. For this purpose, the issue price of any debt instrument is determined by the guidelines laid out in Section 1273 and 1274 of the tax code.

As a result, the debt exchange will give rise to COD income in an amount equal to the excess, if any, of the adjusted issue price of the retired debt instrument over the issue price of the new debt instrument issued in exchange.

In cases like Harrah’s, in which debt instruments are issued in exchange for property other than money, the issue price depends largely on whether the retired instruments or the new instruments are considered “traded on an established market.” If a substantial amount of the new bonds are traded on an established market, the issue price of each bond is the fair market value of the instrument, determined as of the issue date (See Regulation Section 1.1273-2(b).)

Alternatively, if a substantial amount of the bonds are not so traded but, instead, are issued for property that is itself traded on an established market, the issue price of each bond is the fair market value of the property (for which the new instrument is issued), determined as of the issue date.

In addition, property is regarded as being traded on an established market if at any time during the  60-day period ending 30 days after the issue date, the following criteria are met:


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