Future of Atlantis now unknown as debt begins to crush

The deal to place the Atlantis resort in the hands of creditor Brookfield Asset Management has been scuttled following a court ruling that threw the action into doubt.

The Wall Street Journal reported that Brookfield canceled the move when other creditors got a Delaware chancery court to grant a temporary restraining order, blocking Brookfield from closing the deal announced in November

Brookfield’s original offer followed Kerzner International Holding’s default on a $2.5 billion loan, according to the Bahamas Tribune. The Delaware lawsuit alleges that after extending the loan’s maturity three times from September 2008 to September 2011, Kerzner International and advisers were unable to restructure the credit facility.

Judge Parsons wrote in his ruling, “If the proposed transaction is allowed to close, plaintiffs stand to lose the benefit of contractually negotiated rights related to their priority relative to other participants, as well as contractual rights related to their relationship with the borrower.”

The ruling called for hearing to be held January 27 but Brookfield decided to pull the plug instead.

The original deal called for Brookfield to swap its $175 million of Kerzner International Holdings debt for controlling equity in Atlantis and the neighboring One & Only Ocean Club resort, plus a 50 percent stake in the One & Only Palmilla resort near Los Cabos, Mexico.

The suit was brought by creditors Trilogy Portfolio Co. LLC, Canyon Value Realization Fund LP, Canyon Value Realization Master Fund LP and Canyon Balanced Master Fund Ltd., who claimed that Brookfield would not have the same responsibilities towards them as Kerzner International in the event of natural or financial disaster. The four combined are on the hook for only $112 million but are somewhat senior to Brookfield.

The current difficulties for Kerzner International stem from the company’s default on a $2.5 billion loan agreement in May 2011. According to the Bahamas Tribune, company auditors were not able to provide the firm with “unqualified” financial statements for Atlantis and the One & Only Club for 2010.

But the problem traces its roots back to 2006 and Kerzner International’s $3.8 billion leveraged buyout, which took the company private. The company borrowed $3.4 million for the deal, confident that Atlantis would see continued growth.

Then came the credit crisis. According to the lawsuit, Kerzner International net cash flow dropped by $30 million between 2008 and 2009. Occupancy at Atlantis fell from an average 80.3 percent to 61 percent.

Kerzner International and the properties Atlantis and One & Only Ocean Club are said to be still profitable but unable to generate enough income to service the $2.5 billion debt.

This latest development in the ongoing Atlantis crisis has carried over to the Bahamas political world.

Franklyn Wilson, chairman of Arawak Homes and Sunshine Group, said that comments by Prime Minister Hubert Ingraham hurt Kerzner International’s efforts to refinance the debt. At issue are statements about the prime minister made about the Cable Beach / Baha Mar project in relation to Atlantis, saying that the two would split the high-end tourism market.

When the government then approved the Baha Mar project, Wilson believes, Kerzner International’s financial projections regarding Atlantis were no longer valid in the eyes of creditors.

Wilson told the Tribune, “The prime minister, at a certain point in time, when it was clear Kerzner was involved in a serious effort to refinance his loan, made a statement that both those projects, Atlantis and Baha Mar, cannot co-exist.

“We now know that at the time he made that statement, Kerzner was involved in efforts to refinance. It would be reasonable to assume all financiers in conversation with Kerzner would be aware of the statements by the Prime Minister.”

Opposition leader Perry Christie was quick to jump on the anti-Ingraham bandwagon, to which the prime minister responded by attacking the circumstances of the original loan.

Reminding critics that the current debt situation originated during a Christie-led government, Ingraham said, “Kerzner International now has a loan for $2.3 billion and the security for the loan is the properties on Paradise Island. Much of the loan money was spent outside the Bahamas. It was inappropriate and wrong for the government of the Bahamas to agree for the properties on Paradise Island to be put up as a security for a loan where the proceeds of the loan were going to be spent outside the Bahamas.

“That was a big, big mistake.”

At Kerzner International, 76-year-old Sol Kerzner announced on January 3 that he would step down as CEO effective immediately but remain as chairman. South Africa’s BusinesLive website said that the official announcement had been released only recently.

The former regional president for Europe, Africa and the Middle East, Alan Leibman, who joined the group in 1994, has assumed the position of CEO.

Kerzner vacated the CEO spot once before in 2003, making way for his son, Howard “Butch” Kerzner, but took up the post again after his son died in a helicopter crash in the Dominican Republic in October 2006.

Back at Atlantis, despite the uncertainty, business is expected to continue as usual.

Craig Gomez, partner and accountant at Baker Tilly Gomez, told Tribune Business that he does not think employment levels at Paradise Island would be affected by the recent turbulence—good news for the 7,500-8,000 workers if true.

“I believe there’s a mandate from the remaining creditors to maintain certain revenue levels and standards that are quite lofty, and they will need human resources and human capital to hit them,” Gomez said.

Gomez said that the main questions were whether creditors returned to the original relationship and terms with Kerzner International following collapse of the Brookfield deal.

The Bahamas does not have Chapter 11-style bankruptcy laws. Raymond Winder, the Bahamas' chief World Trade Organization negotiator, said, “The reason why Kerzner, Atlantis finds itself in this situation is that we in the Bahamas don't have legislation that allows companies in situations like Kerzner’s to go through restructuring while continuing operations.”

It now remains to be seen what happens next.

“It’s a fight among creditors,” said Gomez.

By Staff