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Legal battle for Atlantis

Bid to block takeover deal
CANDIA DAMES
Guardian News Editor
candia@nasguard.com

Published: Jan 13, 2012

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A group of lenders who financed Kerzner International’s $2.5 billion mortgage has filed legal action in the United States, in a bid to stop Brookfield Asset Management’s takeover of Atlantis and the One&Only Ocean Club.

The lenders accuse the Canadian real estate conglomerate of “brazen self-dealing” in its announced debt-for-equity swap with the financially distressed Kerzner International.

Brookfield has agreed to exchange approximately $175 million of debt for the equity of Kerzner’s Bahamian and Mexican assets.  In return, Kerzner International will enter into a four-year contract to manage Atlantis.

But several other lenders allege in the complaint filed in a Delaware court that Brookfield – the most junior participant in the loan – has “negotiated a sweetheart deal” principally for its own benefit, without regard to the material risk to which it would expose other lenders, risks not contemplated by the original loan agreements.

Listed as the plaintiffs in the matter are Trilogy Portfolio Company, LLC; Value Realization Fund; Realization Master Fund and Canyon Balanced Master Fund Ltd.

They are seeking injunctive relief.

The lenders say that before it exits the loan, Brookfield intends to orchestrate an extension and restructuring of the mortgage loan in ways that would make it materially riskier for the more senior creditors who will remain.

“Although the Brookfield defendants attempt to justify their self-dealing by claiming that the underlying projects serving as primary collateral for the loan could not be sold, or the loan refinanced for an amount sufficient to pay off the balance of the loan in today’s market, they intentionally downplay the fact that the Brookfield defendants are simultaneously positioning themselves to realize a profit several times the amount of the loan they are forgiving if the project turns around and appreciates in value over the coming years,” the complaint says.

The court document says that from the time Kerzner’s loan went into default last spring until or about December 8, 2011, the Brookfield defendants had been acting as ‘special servicer’, charged with a fiduciary duty to administer the loan for the benefit of all lenders and participants as a collective whole.

The court document also names Wells Fargo Bank as a defendant.  The lenders accuse Brookfield of ‘co-opting’ Wells Fargo, which was only appointed special servicer of the loan on December 8, 2011.

Kerzner International Chairman Sir Sol Kerzner and Prime Minister Hubert Ingraham announced at the end of November that Brookfield was taking over ownership of Kerzner’s Paradise Island properties, but the court document shows that those parties have been unable to close the deal and Kerzner sought extensions in this regard.

The lenders allege that Brookfield has declined to even discuss the proposed transaction with Kerzner International.

“With the clock ticking on a transaction that can close on a moment’s notice, the plaintiffs seek by this action injunctive and declaratory relief to maintain the status quo by restraining [Brookfield] from proceeding and/or consummating the proposed Brookfield transaction preventing [the lenders] from forever losing their bargained for rights,” the complaint says.



LOAN DEFAULT

The initial maturity date of Kerzner’s loan was September 9, 2008, at the same time that the 2007-2008 global financial crisis and the construction and 2008 opening of Atlantis Dubai severely restricted Kerzner’s access to cash, the complaint points out.

As a result, Kerzner chose to exercise each of the three-year extension options granted by the loan agreement, extending the maturity date to September 9, 2011, the final maturity date.

Economic conditions improved little between 2008 and 2011, and as a result, Sol Kerzner and his companies have experienced severe difficulty servicing and repaying the multi-billion-dollar debt that they incurred, it notes.

“Upon information and belief, in the months leading up to the final maturity date, Kerzner International, with the help of its financial advisors, apparently pursued various options to refinance the loan, but all were unsuccessful,” the complaint says.

“In the spring of 2011, rumors began to surface that Kerzner International was at risk of tripping a leverage covenant with respect to its own credit facilities.  While such a default would not necessarily result in an event of default under the loan agreement, it was indicative of Kerzner International’s financial distress.”

When he announced the Atlantis ownership change in the House of Assembly on November 29, Prime Minister Ingraham suggested that this turn of events came about because the Christie administration allowed Kerzner to borrow against its Bahamian assets for international developments.

“The reality is Kerzner International in The Bahamas is a very profitable company,” Ingraham said.

“It has nothing to do with whether Atlantis makes enough money.  It has more than enough.  It has more than $100 million in cash.

“It just happened to have too much debt piled up on top of it for all things that weren’t done in The Bahamas and it did so with your (the Christie government’s) blessing and support.”



‘SELF-DEALING’ 

The lenders allege that the proposed Brookfield transaction “is a model of naked and shameless self-dealing, without even an attempt of benefiting the other participants”.

They allege that the proposed Brookfield transaction would confer significant benefits upon Brookfield in flagrant violation of agreements in place, which specify that any property received in respect of the loans be held for the benefit of all lenders and then distributed in accordance with the priorities afforded the loan participants.

“Instead, under the proposed Brookfield transaction, the Brookfield defendants would receive 100 percent of the equity of the borrower, along with Kerzner International’s interest in two other hotels, entitling them to reap all of any future appreciation in value,” the complaint states.

“The Kerzner entities would also benefit from a release of their obligation under the Kerzner guarantees and lucrative management fees, which are fees the Brookfield defendants might also some day receive.”



IMPLICATIONS

This latest development relating to the country’s largest private employer and the ownership of the Paradise Island assets comes amid widespread concerns on the heels of the takeover announcement in November.

Both the Progressive Liberal Party and the Democratic National Alliance have recently upped demands for the government to make details of the ownership deal public.

Ingraham previously noted that the 8,000 direct jobs at Kerzner attract an annual payroll of approximately $189 million.

Each direct job at Kerzner creates an additional 1.25 to 1.5 indirect jobs in the economy – 10,000 to 12,000.

“In all therefore, some 18,000 to 20,000 jobs; 15 percent of all jobs in our economy, are related directly to the operations of Kerzner International in The Bahamas,” Ingraham said in November.

He noted further that Kerzner adds tens of millions of dollars in contributions to the Bahamian economy as a result of its operations.

Ingraham said that on an annual basis Kerzner pays $190 million locally to purchase goods and services; $47 million to the Bahamas Electricity Corporation; $27 million on business licence fees inclusive of resort hotel license fees and licenses for joint venture timeshare and condominium operations, and $20 million in room tax.

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