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LAS VEGAS- Harrah’s entertainment confirmed Monday that it is delaying the completion and opening of its 660-room, 23-story Octavius Tower addition to Caesars Palace indefinitely. This adds to a growing list of under-construction projects that have been put on ice lest they be delivered into a softening market that–even without the postponed projects–will gain thousands of new hotel rooms in the coming months. Average hotel occupancy in November, the most recent data available, was 83%, down from over 90% in the same year-earlier period, according to the Las Vegas Convention and Visitors Authority.

Harrah’s spokesperson Gary Thompson tells GlobeSt.com, the exterior of Octavius Tower will be finished and the ground level that connects to the rest of the resort will open mid-summer along with an additional 110,000 square feet of meeting and convention space, an expanded pool and garden area and three additional luxury villas that are part of an overall $1-billion expansion of the resort. The interior work above the ground level will not start until the market conditions approve, he says.

“We’ve extended [the opening of the tower] to a date uncertain; the reason we’ve done that is we don’t see sufficient demand,” Thompson says. “A lot of rooms are coming online in the next several months and demand has been off even without those rooms being online so we will wait until we see a strengthening of demand. We’ve seen a lot of advance booking for the meeting and convention space so we are continuing with that project, which is a separate facility, and we recently completed an extensive remodel of the 500 rooms in Forum Tower so guests can still stay in some extremely nice facilities.”

Word of the Octavius Tower decision leaked over the weekend when one of the general contractors on the project made an announcement. When the company decides to move forward, the interior can be finished and the tower opened in a matter of months. Additional details–such as the total temporary cost savings–will be released on or before the March 13 earnings conference call, Thompson says. After the expansion, Caesars Palace will have more than 4,000 hotel rooms and 300,000 square feet of convention space.

Harrah’s was acquired in January by private equity firms TPG and Apollo Management. The company is weighted down with $23.9 billion in debt, much of it attributable to the privatization. TPG and Apollo, each of which put up $1.3 billion in the buyout, have since written down their stakes by approximately 20%. Other investors include Blackstone Group, which put up $275 million.

In its third quarter report issued in November, Harrah’s reported a big jump in interest expense. Interest expense in 3Q08 was $526 million, compared to $213.8 million in 3Q ’07. In a conference call with analysts shortly thereafter company executives said they fully expect to be able to continue to access the company’s revolving credit line, notwithstanding maximum leverage ratio covenants.

In December, Fitch Ratings said a number of issuers including Harrah’s are at increased risk of bumping up against covenants in 2009, and will be approaching credit facility expirations in 2010-2011, making the bank lending climate increasingly important as 2009 progresses. It said Harrah’s was attempting to address near-term maturities and/or heavy LBO-related debt loads with debt exchanges, but had yet to complete the transaction.

“It is clear the terms will be much more costly than those of the existing agreements that were entered into during a more accommodating credit environment,” Fitch stated. “In addition, there may be downward pressure on the size of the commitments as investment banks seek to limit their own balance sheet exposure. Downsized commitments will contribute to a slower growth rate for the industry over the next three-to-five years.”

Beyond the credit issue will be the supply issue. On the heels of at least 8,000 rooms in 2008, including the 3,000-room Palazzo and the 2,000-room Encore, nearly 14,000 more hotel rooms are slated to come online in Las Vegas in 2009, according to a late October report by the Las Vegas Convention and Visitors Authority.

It wasn’t immediately known how many rooms have been shaved since October but it appears the bulk of the rooms–more than 6,000 at Citycenter [even without the Harmon Hotel, which was recently delayed by MGM Mirage] and 3,890 rooms at Fontainebleau Las Vegas–will indeed be coming on line. Not included in the total is the 3,000-room Cosmopolitan resort rising between Citycenter and Bellagio. Initially scheduled to open in late 2009, completion of the project was pushed back to 2010 this fall after the lender, Deutsche Bank, took control of the property.

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