The Tribune

By NEIL HARTNELL

Tribune Business Editor

KERZNER International is earning base management fees equivalent to 2 per cent and 3 per cent of gross revenues generated, respectively, by the Atlantis and One & Only Ocean Club under the terms of its $2.5 billion debt restructuring, Tribune Business can reveal.

Never-before revealed details of the former Paradise Island resort owner's deal with its lenders are contained in a Standard & Poor's (S&P) report obtained by this newspaper, other information disclosing that Atlantis achieved an average 64 per cent occupancy rate for the nine months to end-September 2011.

The S&P report, detailed May 24, 2012, also notes that the Atlantis and One & Only Ocean Club properties remain mortgaged to the extent of a $2.3 billion securitised loan, which has been extended until September 9, 2014.

Brookfield Asset Management, which exchanged the $174.4 million owed by Kerzner International to its BREF Bahamas fund for 100 per cent equity ownership of the two resorts' real estate, now has the responsibility of re-paying that $2.3 billion.

S&P received its information from Wells Fargo, the bank that acted as special servicer to the Kerzner International loan once it went into default in 2011 last year.

The Wall Street credit rating agency's report said: "According to Wells Fargo, the terms of the loan modification include, but are not limited to: Kerzner to continue managing the Atlantis resort and the Ocean Club properties for a base management fee of 2 per cent and 3 per cent, respectively."

These fees, and their amount, are in line with what many brand operators in the Bahamian hotel industry earn for managing resort properties in this nation.

The S&P report, though, provides further details and insight into the restructuring that led to the 'debt-for-equity' swap which paved the way for Brookfield, the Toronto-headquartered asset manager, to take over the two Paradise Island resorts that it branded as "iconic".

It was previously disclosed that Kerzner International has been given by Brookfield a "minimum" three-six year management agreement for Atlantis, and a 15-year agreement to run the One & Only Ocean Club, provided it met certain performance targets set by the new owners. The fees, though, were not.

Other details disclosed by the S&P report were:

• The maturity of the $2.3 billion loan secured on Atlantis and the One & Only Ocean Club's real estate, plus other Paradise Island assets, has been extended to September 9, 2014.

• A $10 million paydown on the principal owed to Kerzner International's senior lenders occurred when the debt restructuring closed on April 27, 2012.

• Cash held in what is called an "excess cash reserve account", totalling more than $60 million, will be employed on an equitable to pay down principal owed to both senior and junior lenders.

• The interest rate paid to senior lenders has not changed.

• Junior lenders have seen a 25 basis points, or 0.25 per cent, increase in the interest paid on the debt owed to them

• Wells Fargo waived its rights to special servicing fees and other remuneration in exchange for a one-time $2.5 million fee "paid by the borrower", likely meaning Kerzner International

Meanwhile, S&P added: "Standard & Poor's received notification from the master servicer, also Wells Fargo, that it transferred the Kerzner International portfolio loan on January 25, 2012.

"The loan was transferred due to maturity default after the borrower was unable to pay-off the loan by its November 14, 2011, extended maturity date.

"As of the May 15, 2012, trustee remittance reports, the Kerzner International portfolio loan has a whole-loan balance of $2.3 billion, which is [divided] into a $1.3 billion senior participation interest and a $1 billion subordinate non-trust junior participation interest."

S&P is rating the creditworthiness of the mortgage-backed securities underwritten by the Kerzner International debt, and said the restructuring would have no impact on their assessment. It added that the rating may improve if further "deleveraging" and principal paydowns occurred.

"Wells Fargo reported a debt service coverage (DSC) of 4.26x for the senior participation balance, and a 64 per cent occupancy for the nine months ended September 2011," S&P said of the Paradise Island resorts' performance.

In return for the Government approving the debt-for-equity swap, Brookfield agreed to keep direct Paradise Island staffing levels at a minimum of 8,000; maintain annual capital investment spending at Atlantis at a $50 million minimum; and keep the resort's brand marketing spend at current levels.

Tribune Business, though, reported at the time that the final version of Kerzner International's debt restructuring was slightly more complex than the Government, and both Kerzner International and Brookfield, have let on publicly.

While Brookfield has taken over 100 per cent ownership of the Paradise Island real estate, in terms of the physical Atlantis and One & Only Ocean Club properties, Tribune Business understands that at least two other lenders were also brought on to the 'equity' side of the debt restructuring.

Real estate investment funds owned by two leading US-based private equity houses, TPG (the former Texas Pacific) and Centerbridge, now hold equity stakes in whatever entity will operate/manage both Atlantis and the One & Only Ocean Club. This arrangement, a change to the original Brookfield 'debt for equity' swap proposal, was worked out to bring all lenders - some of whom felt they were being disadvantaged - on board.

This means that they will be sitting around the Board table with Kerzner International, although it is uncertain who holds the majority interest here, and the extent of these funds' ability to 'call the shots' when it comes to running the resorts.

The decision to take an equity stake in the operating entity is a smart strategy for both private equity players, as its profits will likely be based on a percentage of the gross revenues (top line) generated by Atlantis and the One & Only Ocean Club.

That is the norm for brand/operator companies in the global hotel industry, and the percentage normally ranges between 2-5 per cent depending on the contract. And, as their profits depend on operations only, not the net, Kerzner International and the real estate funds will not be impacted by issues such as depreciation in real estate values.