The Tribune

By NEIL HARTNELL Tribune Business Editor THE ATLANTIS resort's potential new owner could lose the entire $175 million it is owed if the proposed debt-for-equity swap with Kerzner International fails to go through, a lawsuit seeking to block the deal is alleging, as a sale of the latter's Paradise Island resort assets would raise less than $2.3 billion. The complaint, filed against Brookfield Asset Management by four other junior lenders to Kerzner International on January 4, 2012, alleges that the Toronto-based asset manager could be "out of the money" because the $175 million it is owed is the "most junior" of the debt tiers owed by the Atlantis and One & Only Ocean Club owner. An alleged analysis conducted on the potential realisation if Kerzner International's Paradise Island assets were sold said that in "today's market" the properties would fetch "less than $2.31 billion" - a sum less than the collective $2.5 billion owed to all holders of the company's mortgage-backed securities. Given that the lending agreement calls for lenders to be paid off in the order of how senior their debt is, the lawsuit implies that Brookfield, through its Brookfield Real Estate Fund (BREF) vehicle, could lose its entire $175 million exposure if the lending syndicate decided to foreclose on the mortgages it holds on Paradise Island and force a subsequent sale. Therefore, to protect itself, Brookfield had little choice but to propose the debt-for-equity swap with Kerzner International - a deal that allegedly benefits itself at the expense of all the more senior lenders. The lawsuit, filed in the Chancery Court of Delaware, also gives the impression that Sir Sol Kerzner and his company snatched at Brookfield's proposal because they had no other way out of their over-leveraged debt crisis. Under the terms of the proposed deal, Kerzner International will be freed from its burdensome debt obligations and escape with some upside, via the management contracts for Atlantis and the One & Only Ocean Club. The lawsuit also alleges that: * An appraisal of Kerzner International's Paradise Island properties valued them at $3 billion. * Under the terms of the proposed deal between Kerzner International and Brookfield, the former is to "pay all transfer taxes" incurred in transferring Atlantis and the One & Only Ocean Club. Indeed, Brookfield is only to pay $3 million in connection with legal fees and costs incurred in this process * Brookfield is positioning itself to succeed Kerzner International as manager of both Paradise Island properties * The management agreement for the One & Only Ocean Club would be senior to Kerzner International's existing loan obligations, and remain in place even if a foreclosure took place The four junior lenders behind the lawsuit, the Trilogy Portfolio Company, Canyon Value Realisation Fund, Canyon Value Realisation Master Fund, and Canyon Balanced Master Fund, are attempting to block Brookfield's deal with Kerzner International on the grounds that it is "brazen self-dealing" that puts the Toronto-based asset manager's interests ahead of all other lenders. They are also alleging that Brookfield breached its fiduciary duty to other lenders, given that as 'special servicer' with the duty to administer the loan on behalf of all parties, they had to work to maximise recovery for everyone once Kerzner International went into default. As the most junior lender, Brookfield also had the status of 'Directing Holder' under the loan terms. "During the fall of 2011, apparently in order to ensure that they maintained their status as Directing Holder and Special Servicer under the Intercreditor Agreement, and Controlling Holder under the participation agreement while their negotiations with Kerzner were continuing, the Brookfield defendants commissioned an appraisal of the project by HVS Consulting and Valuation Services," the lenders alleged. "Despite the Brookfield defendants contentions that the project cannot be sold or the loan refinanced for an amount sufficient to pay the full outstanding balance of approximately $2.5 billion now due to all lenders and participants, this appraisal found that the project had a current market value in excess of $3 billion. "However, if this appraisal is an accurate measure of the potential future value of the project, the Equity Interests to be received by the Brookfield defendants in the proposed transaction could be worth several times the amount of the principal they would be forgiving." The lenders alleged that Brookfield was ineligible to act as the Directing Holder come December 8, 2011, as once the term sheet deal was entered into with Kerzner International, it had acquired the power to direct the borrower's management. "BREF One [Brookfield] may also have been ineligible to serve as Directing Holder for another reason - it may have been out of the money at that time," the lawsuit alleged. This was because Brookfield was the most junior lender who stood to be paid last. "According to an analysis contained in the Consent Request, a sale of the borrower or the project [Atlantis and the One & Only Ocean Club] in today's market is likely to raise less than the $2.31 billion in participations that area ahead of BREF One's participation, indicating that BREF One may have been 'out of the money' as at December 8, 2011." Describing the $175 million debt-for-equity swap as "a model of naked and shameless self-dealing" by Brookfield, the other lenders said it would result in them being stripped of guarantees made by Kerzner International over the original loan agreement, and they would "be forced to bear the substantial risk" resulting from another extension to the loan's maturity. The Brookfield-Kerzner deal, as alleged by the Delaware lawsuit, requires Kerzner International "to pay all transfer taxes imposed by the Commonwealth of the Bahamas". The two parties are understood to be negotiating a waiver of what was described as "several hundred million dollars" in transfer taxes, many believing the Government will grant the request. The deal would also release Kerzner International from its obligation to compensate the lenders if "bankruptcy or insolvency proceedings" were commenced against it. The replacement guarantees, provided by Brookfield's BREF vehicle, were alleged to be "watered down". BREF was said to be "a less creditworthy entity which, upon information and belief, is winding down and expects to complete the liquidation of its portfolio by 2014". Kerzner International, under the loan terms, was supposed to maintain liquid net worth of at least $500 million. And Brookfield's BREF One vehicle would only incur $3 million in expenses associated with the Atlantis and One & Only Ocean Club's asset transfer. Then the lenders alleged that the deal would lead to "the replacement of the existing management agreements that provide for an enormous increase in management fees to the Kerzner entities that manage the properties, in some instances on a senior basis to the obligations under the loan". There management agreements were structured so as to continue even if the One & Only Ocean Club was sold to someone else. And these agreements also allegedly pave the way for Brookfield to supplant Kerzner International as manager of the Paradise Island properties. "Further amendment of the management agreements to permit a Brookfield defendant or an affiliate thereof to serve as manager (and to receive the substantial fees which would otherwise be paid to Kerzner), and to ensure that the Ocean Club management agreements cannot be terminated if the loan is foreclosed (even sold to a third party)," the lawsuit alleged. It said the Kerzner-Brookfield deal "vastly increased" the former's compensation, and allowed a Brookfield affiliate to succeed it as manager. "These changes, which mean that Kerzner (or a Brookfield affiliate as successor manager would have to remain as manager of the Ocean Club following a foreclosure could effectively chill future bidding by third parties," the lenders alleged.