By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Government was told it would gain an equity stake in the $3.5 billion project should Baha Mar default on its loan repayments and the Chinese ‘call in’ any sovereign guarantee made to resolve the current impasse.
Tribune Business was last night shown e-mails confirming that the China Export-Import Bank’s demand that the other parties ‘fully guarantee’ its new $200 million loan facility, and their inability to agree upon doing so, was at end-July “the single lone issue” preventing a settlement to the Baha Mar dispute.
The e-mails also suggest that Baha Mar asked the Christie administration to pressure the China Export-Import Bank to drop its ‘guarantee’ demand.
And, if that failed, it requested that the Government then provide a sovereign guarantee for the $175 million balance that Baha Mar itself has baulked at covering.
To ‘sweeten’ such a deal, Baha Mar’s attorneys argued that it would be a “contingent liability” requiring the Government to fork out no cash or other assets up front.
And, should the developer default and the Chinese bank call in the guarantee, they suggested the Government - on behalf of the Bahamian people - would gain an equity stake in the development.
The e-mails match, and effectively confirm, the Government’s revelation that Baha Mar asked for a sovereign guarantee during talks in Beijing that aimed to resolve the Baha Mar dispute.
A draft letter to Prime Minister Perry Christie, put together on July 28 by Tyson Lomazow, one of Baha Mar’s US attorneys, set out the developer’s request and position.
“I am writing to you in respect of the single lone issue that must be resolved before the parties can move forward,” Mr Lomazow’s draft letter read.
“The issue involves China Export-Import Bank’s request for the provision of a $175 million guaranty of the new $200 million bank loan to be issued to Baha Mar, to accompany a $25 million stand-by letter of credit to be issued by Mr Izmirlian.
“We are proposing, in the first instance, that the Government of the Bahamas request that China Export-Import Bank drop its request for credit support in light of the requirement it has imposed on another state-owned enterprise,” the attorney continued.
“Given the bank’s continued insistence on such credit support, however, in the alternative, we request that the Government of the Bahamas be the issuer of this guarantee on behalf of the Bahamian people.
“Because the guarantee represents a contingent liability and there will be no actual payment of cash or other assets to China Export-Import Bank at the time of its issuance, we believe the guarantee could provide for the Government to obtain an equity stake in Baha Mar post any default and following the calling of the guarantee. It is only then that the Government would be obligated to pay the guaranteed payment amount, or provide some other incentive in lieu thereof, if at all.”
Mr Lomazow’s draft letter added that Baha Mar and its contractor’s parent, China State Construction Engineering Corporation (CSCEC), “have reached a commercial agreement that will allow for the immediate re-mobilisation of the Baha Mar project and the dismissal of the Chapter 11 cases and litigation pending in the UK........
“An agreement is of critical importance, as it will resolve bitter litigation between the parties, eliminate the instant stalemate, and allow for the timely completion of the resort, which will inure to the benefit of the Bahamian people.”
The guarantee issue remains a key sticking point, though, with the Government refusing to be induced to provide the $175 million guarantee.
China Construction America (CCA) had initially wanted Baha Mar to ‘back stop’ the $175 million guarantee it was providing to the back, something the developer and the Izmirlian family refused to do.
CCA later reduced its demand to $100 million, yet Sarkis Izmirlian, Baha Mar’s chairman and chief executive, and father, Dikran, appear to have ‘drawn a line in the sand’ and will not commit to further funding beyond a $100 million equity injection and $25 million ‘letter of credit’ as a guarantee.
Had the Government agreed to the ‘sovereign guarantee’ request, the Izmirlians and contractor would have matched the bank’s $200 million with $100 million preference share investments of their own.
The Izmirlians would have received a 12 per cent interest coupon on their new investment, and the Chinese 7 per cent, with both ranking equally but junior to China Export-Import Bank’s $2.45 billion existing facility and new $200 million loan.
The contractor’s existing $150 million preference share investment would have seen its interest returns drop from 18 per cent to 12 per cent, with dividends not accruing for four years.
Baha Mar was also to pay CCA $35 million in disputed payables, and the two sides were to agree on a construction completion schedule.
Comments
BaronInvest 8 years, 7 months ago
So in short, a poor government decision caused all of this. I'm missunderstanding something here ? If Sarkis succeeded the guarantee would have saved the resort. If Bahamar would not succeed the Bahamians would own a share of the resort and get their money back when it gets liquidated. Sounds like both options would have been a big win - in any case. What possible reason could have been there not to assist Sarkis with this fantastic solution for the Bahamas ? I keep reading this article, thinking i must be missing/not understanding something, because this article makes the decisions made look even more stupid if i understood every correctly. Can someone clarify ?
Well_mudda_take_sic 8 years, 7 months ago
The Bahamian people have already given way too much to this project by way of concessions. The developer, the Chinese general contractor and the Chinese lender bank have all carefully crunched the numbers and now fully realize that the project is in fact too big to succeed and will not be profitable or sustainable from a cash flow standpoint at its expected total debt level upon completion. Recent events (since the end of June) have added many millions more to the cost of completing and opening the project as a result of the significant negative goodwill that has been created in tourist markets around the world. Christie, Maynard-Gibson et al have managed to botch things up so badly that now both Baha Mar and the China Export Import Bank are looking to the Bahamian people to issue a guarantee of the projects success to the extent of $175+ million for which the Bahamian people will receive an equity stake in the project if it should fail. In other words, if the Bahamian people pony up the guarantee sought and the project fails (as it will undoubtedly do at its present debt level), then the Bahamian people will have to shell out $175+ million in cash (which we will have to borrow at a high rate of interest given our poor country's poor credit rating) and thereafter we will be required to fund an equity share of the negative cash flows and losses associated with the failed project. The equity stake the Bahamian people receive in the failed project will have no value and will obviously be wiped out when the China Export Import Bank forecloses on the mortgage charge they hold. The best thing the Bahamian government can do is claw back as much as possible of the concessions that were granted to the developer unless the China Export Import Bank is willing to take a significant haircut on Baha Mar's unsustainable debt burden owed to it in exchange for an equity stake of its own in the project. We (the Bahamian people) can ill-afford our government issuing the requested guarantee knowing that the project will fail because of its excessive debt burden which means any equity stake tied to the call of the guarantee will be of no value, and in fact will be a liability to the extent we will be required to fund an equity share of the failed projects negative cash flows and losses going forward. This is one big rotten apple that our government would be most stupid to take a bite out of.
Reality_Check 8 years, 7 months ago
Neither Baha Mar, China Construction Company of America nor China Export Import Bank are willing to issue the same type of guarantee with equity sweetener that they all now seek to obtain from the Bahamian people, and with good reason. Such an arrangement would only serve to transfer on to the backs of the Bahamian people losses that should be incurred by them down the road. Our National Debt already stands at more than $6.3 billion and that's without the significant additional debt we will need to take on in the near term for many more pressing things like getting BEC sorted out. You are absolutely right Well-mudda; only a foolish Bahamian government would take a bite out of this big rotten apple on terms that no one else involved with the project is willing to do!
BaronInvest 8 years, 7 months ago
I tend to disagree. You would own a share and you would liquidate the property yourself - legally allowing the Bahamas to take the best pick. In addition to that you could have negotiated to give a 175m guarantee, but in return receive equity shares to an amount that actually covers all your interest/costs plus some profit. E.g. ask for 250m equity shares for a 175m guarantee. And let's not forget, your got downgraded now because of wrong actions taken, at the point you had the opportunity the country was not downgraded by S+P. Sarkis is confident and willing to complete the project, it's a project he spent 13 years of his life on, so if you offer him a helping hand even for a super high price in case he fails i'm sure he would rather take that than seeing what he worked for going down.
killemwitdakno 8 years, 7 months ago
Could lease the boats to the Turks and sell more for something that profits. But why are Bahmians only included in case of a default, we're not that ass.
It will at least break even in the beginning to where Bahamians would get at least their money back. Will have to be promoters. It has to be too successful to fail.
Asking Bahmains to cover in case of failure is just criminal , especially when the co strict ion workers who contributed to this mess get shares whilst the people who live here and donated in tax and more don't have some trust funds or guaranteed infrastructure from a prevent of the revenue like Atlantic city casino provides.
Bahamians guarantee Chinese construction when we have hurricanes ?!? Ha. Only if locals finished it MIGHT that be considered. This is turning into a game of Chinese construction companies cheating foreign governments and their own.
Tarzan 8 years, 7 months ago
The "right" answer was a Chapter 11 proceeding under a well tested set of laws that permit proper administration of a work out.
That would have permitted the project to proceed; the employees, both Bahamian and foreign to be paid; and, the local Bahamian creditors to be paid in an orderly fashion.
The only parties who would be prejudiced in such a proceeding would be CGA which would have been required to defend shoddy construction and serial breaches of contract, and any corrupt politicians who had dipped into the pot of money CGA was pulling out of the project for a share of the spoils.
Why was this procedure rejected out of hand? You figure it out.
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