By NEIL HARTNELL
Tribune Business Editor
Baha Mar’s dash for Chapter 11 bankruptcy protection was sparked by fears it “would run out of cash” today, with the $3.5 billion project’s inability to open on March 27 having had a “disastrous” and “devastating” effect.
Thomas Dunlap, Baha Mar’s president, disclosed that the $3.5 billion developer’s cash resources were “exhausted” in an affidavit filed yesterday with the Delaware Bankruptcy Court.
In the absence of “viable options” to seeking Chapter 11 protection, Mr Dunlap said Baha Mar had also effectively set a three-week deadline for the resolution of the dispute with its Chinese partners - the China Export-Import Bank and China Construction America.
And he warned that if no solution could be reached, “an alternative arrangement” to finance Baha Mar’s construction completion would be found.
The three-week deadline for determining Baha Mar’s future also appears to be the time when its recently-hired 2,070 employees will learn their fates. Many were yesterday told not to report for work.
Baha Mar said in a statement that “if we cannot reach a consensual resolution” with the Chinese “in the next few weeks, we will have to make some extremely difficult decisions that would include workforce reductions”.
Mr Dunlap, in his affidavit, blamed China Construction America’s intransigence, missed building deadlines and “other performance failures” for Baha Mar’s present predicament.
Suggesting that the $3.5 billion development was 97 per cent complete, Mr Dunlap said the Chinese contractor gave it sufficient warning that it would miss the original December 2014 opening date. This allowed the developer to “swiftly implement measures” permitting it to continue operating without the projected cash flows and liquidity from the new properties.
“The second missed construction completion date, however, proved disastrous as China Construction America effectively provided no advance notice that the March 27, 2015 deadline would not be met,” Mr Dunlap alleged.
“This resulted in the debtors [Baha Mar and its various companies] having ramped up to employ over 2,000 employees hired in anticipation of the project’s opening, at an increased cost of approximately $4 million per month, in addition to other significant sunk costs such as operating supplies, advertising, and promotional activities.
“Due to the considerable construction delays, additional expenses incurred mitigating China Construction America’s breaches and failures to perform, extended operations costs, the significant costs of hiring and retaining the new employees in the hope of opening the project, the lack of meaningful revenue generation, and the absence of a definitive construction completion date, the debtors exhausted their liquidity and were forced to commence the Chapter 11 cases.”
Mr Dunlap alleged that China Construction America had failed to repay the $54 million it had promised to return to Baha Mar if it missed its construction completion deadlines.
The Baha Mar president also accused China Export-Import Bank, the project’s $2.45 billion debt financier, of “refusing to advance” the remaining $112 million left on that credit facility.
He added that the bank wanted “certain unattainable conditions, including additional equity contributions” in return for releasing those monies.
Mr Dunlap alleged that Baha Mar was ready to contribute its 50 per cent share of the $30 million in additional equity sought by China Export-Import Bank on March 20, 2015.
However, he claimed that China State Construction and Engineering, the contractor’s parent company, never made the matching $15 million contribution despite demands by Baha Mar that it live up to previous agreements.
And Mr Dunlap further alleged that the construction delays had caused Baha Mar’s hotel operating brand partners - Rosewood, Hyatt and SLS - to “postpone the contribution of as much as $52 million of ‘key money’” that they are due to pay the developer prior to the project’s opening.
“By the end of May 2015, it became clear to the debtors [Baha Mar] that, without a negotiated resolution, they would run out of cash by the end of June 2015, if not sooner,” Mr Dunlap alleged.
“Accordingly, the debtors began contingency planning, including for a potential chapter 11 filing. Nevertheless, during such time, the debtors continued to engage in constant negotiations with China Export-Import Bank, China Construction America and China State Construction and Engineering in an effort to achieve a consensual resolution that would bring China Construction America back to work to finish the project as soon as possible, while providing the debtors with the necessary liquidity.”
The Baha Mar president added: “On three separate occasions in the last two months, the debtors’ management team has travelled to Beijing to meet with representatives of China Export-Import Bank, China Construction America and China State Construction and Engineering.
“Unfortunately, no resolution was reached. With its cash exhausted and no other viable options for pursuing continued negotiations, the debtors commenced the Chapter 11 cases.....”
Baha Mar needs $30 million to fund its operations for the next 30 days and make it through until court hearings in three weeks’ time. Its principal, Sarkis Izmirlian, has agreed to arrange a debtor-in-possession financing facility, worth a total $80 million, to cover this need.
“The Debtors’ financial projections indicated that the debtors [Baha Mar] require up to $30 million of financing to continue to operate and fund the project until further court hearings, which are anticipated to take place in three weeks’ time, during which time either the disputes with China Export-Import Bank, China Construction America and China State Construction and Engineering are resolved or an alternative arrangement is found.”
Mr Dunlap did not specify whether this means Baha Mar is searching for alternative financing and/or construction partners, as this implies.
Sources close to Baha Mar yesterday confirmed to Tribune Business that the Chapter 11 bankruptcy filing had two main objectives: To stave off the “liquidity crunch”, and prevent any of its creditors - the Chinese, the Government and Bahamian businesses and contractors - from initiating foreclosure proceedings against the development.
US Chapter 11 bankruptcy procedures are design to give debtors protection from their creditors until they can reorganise their financial affairs and business relationships.
Debtors, such as Baha Mar, have to use the ‘breathing space’ obtained by the Chapter 11 filing to come up with viable reorganisation plans that are approved by the bankruptcy court and a majority of creditors.
The hope is that Baha Mar will emerge, healthier and stronger, from Chapter 11, and with its various disputes with its Chinese partners resolved so the project can be completed and opened for the benefit of the Bahamian people and economy.
Tribune Business was also told that Baha Mar’s Chapter 11 filing was designed to concentrate minds among both its Chinese partners and the Christie administration about the urgent need to resolve the project’s woes.
This newspaper can confirm that the Izmirlian move caught the Government off-guard, and effectively blindsided it, as Baha Mar gave the Christie administration no advance warning of what it was about to do.
“This is something that had to be done in the dead of night,” one source familiar with the situation told Tribune Business.
“It was not something he [Izmirlian] took lightly. It’s definitely an unfortunate situation, but somewhat necessary to protect the asset.
“If he’s going to put more money in, he has to protect himself to get results. He’s shielded all his workers from any loss of wages or loss of income by keeping them on at great expense.
“He’s [Izmirlian] using every angle, every avenue to keep the people employed and the property going, but every time he takes a left or right turn, he gets thwarted.”
The Chapter 11 move also protects the Izmirlian family, for the moment, against any effort by the Chinese to oust them from the project. Tribune Business had, within the last week, been picking up whispers from international sources that such moves were indeed in the works.
“The objective is to get everyone to the table, and get this project finished as quickly as possible,” the source said of the intent behind the Chapter 11 filing. “Get everyone’s attention and make it happen now. Now it gets their attention.”
They added that Baha Mar’s Chinese partners “certainly weren’t engaging in a meaningful process” to address the development’s problems.
Accusing the Chinese of leaving Baha Mar’s e-mails unanswered, the source said: “They just wanted Izmirlian to put in more money with no construction completion deadline.”
A Bahamian accountant familiar with Chapter 11 processes, and liquidation/receivership procedures, described the Baha Mar filing as “a fantastic move on their part”.
“I think this is the best thing for them,” they added.
Another financial executive added that the move ensured Mr Izmirlian, not the Chinese nor the Christie administration, remained in control of developments surrounding Baha Mar.