TRIBUNE BUSINESS ANALYSIS: Izmirlian sacrificed for Chinese benefit

Baha Mar’s original developer Sarkis Izmirlian.

Baha Mar’s original developer Sarkis Izmirlian.

The meaning of Baha Mar’s legal wrangles

The Baha Mar winding-up petition is not a nationalisation of private investor assets. Give the Government credit on that one, not Baha Mar. If the petition is successful, the $3.5 billion project will be under the control of the Supreme Court, and its provisional liquidator officers, not the Christie administration.

And when Baha Mar says that the Government’s legal move “significantly jeopardises” the resort’s future, what it really means is that the Izmirlian family’s continued ownership and $850-$900 million investment has been put at extreme risk.

Here is the impasse in a nutshell:

  • Baha Mar was not completed on time, ultimately forcing the developer to file for Chapter 11 bankruptcy protection.

The developer blames everything on the contractor, and wants to dump China Construction America.

  • With common ownership via the Beijing government, the China Export-Import Bank refuses to allow this. It seems to side with its contractor colleague in an effort to squeeze the Izmirlians out.

  • The dispute becomes increasingly bitter and deep-rooted, with no resolution to unclog the impasse. The Government seems to side with China.

There are many unanswered questions surrounding the Government’s proposed winding-up petition, especially if it is successful, and the implications for the $3.5 billion project. Here are some of the key ones.

What happens to Baha Mar’s 2,400 employees if the provisional liquidators take control?

If the Supreme Court approves their appointment, and rejects Baha Mar’s application for recognition of the Chapter 11 bankruptcy proceedings, they will be taking over multi-billion dollar real estate assets that are currently generating no cash flow.

In company receiverships and liquidations, among the first actions taken is usually to lay-off a significant percentage of the staff. Baha Mar, with no income, is in this exact spot, meaning the liquidators may well follow through on the plan to reduce employee headcount to ‘skeleton’ levels.

This would imply that around 2,400 staff will still be made redundant, unless the Government (the taxpayer) or China Export-Import Bank can be persuaded to pick up the salary tab.

Who will pay the provisional liquidators’ costs?

All receivers/liquidators charge a hefty fee for the services of themselves and their agents, and the PricewaterhouseCoopers (PwC) advisory team and their attorneys will be no different if appointed at Baha Mar.

Again, with no income to cover these costs (apart from whatever the Melia may be generating), will the Government and/or China be covering this?

What about Baha Mar’s Bahamian creditors?

Local contractors and suppliers are owed around $70-$80 million collectively, it is understood, a huge sum for an economy this size. It is simply untenable, politically, economically and socially, that they are not made whole.

Given that there is no cash flow to do this, and that the plan is for the provisional liquidators to restructure Baha Mar in concert with the Chinese, it appears likely that the Government will have to call on the latter to rescue Bahamian businesses and entrepreneurs via the injection of funds to cover $123 million in unsecured debts to trade suppliers.

An eventual sale of Baha Mar, if that is what occurs, will probably only generate enough proceeds to cover the China Export-Import Bank’s $2.45 billion secured debt, and leave local contractors and others with next to nothing.

A political solution for the sums owed to Bahamian creditors is thus essential.

What about Bahamian retail and restaurant investors at Baha Mar?

A successful winding-up petition will not do much for them. Their best outcome is the most rapid completion and opening of Baha Mar as possible.

Among those with significant exposure here is the John Bull Group of Companies, which has the ‘master lease’ arrangement with Baha Mar, plus restaurant owners such as the Skandalaris brothers and others.

Who has been forgotten in all this?

Scotiabank (Bahamas). The bank, if the provisional liquidators are appointed, would be in the same position as the Izmirlians in facing the entire loss of its equity stake in the $3.5 billion project.

This is thought to have been worth $125 million, and was taken in a debt-for-equity swap that resolved the Izmirlians’ difficulty in repaying the $200 million loan they took out to acquire the then-existing Cable Beach resort properties.

Such developments could have a dramatic impact on Scotiabank’s balance sheet and profitability, as the Baha Mar investment would have to written down or off. Not sure if this has entered the Government’s thinking.

Why go for the winding-up petition, rather than allow the China Export-Import Bank to foreclose and exercise the default remedies it has via lender security?

Tribune Business understands that the bank does not want to run afoul of the US justice system by contravening the orders issues previously by the Delaware Bankruptcy Court.

The plan is for the provisional liquidators, once installed, to withdraw the Chapter 11 proceedings, thereby removing the obstacles for the bank to realise its security.

What about the Prime Minister’s assertion that bringing control of Baha Mar’s fate under the Supreme Court, and out of the hands of the Delaware Bankruptcy Court, will result in a faster opening and resolution?

Unproven. For starters, Mr Christie relied on a more than 30 year-old corporate restructuring to back his case, and the relevant laws have changed much since then. In other words, his example is not necessarily applicable.

The Prime Minister is backing China, rather than the Izmirlians, as the fastest way to finish Baha Mar and open. Getting the winding-up petition approved by the Supreme Court would remove control at Baha Mar from Mr Izmirlian’s hands: Advantage the Government and China.

If it stays in Delaware and the proceedings there are recognised here, advantage Mr Izmirlian: He stays in control.

Given the pace at which Bahamian justice often functions, it is hard to say it will provide a speedier resolution to the Baha Mar saga simply by moving proceedings back here.

Should the Government be intervening in a private commercial dispute, as it has done via the winding-up petition?

The $64,000 question. There is no doubt that Baha Mar represents something of a unique case, given its importance to the country’s economic well-being, and one can understand the Government’s urgency to resolve it given that a rating downgrade is looming, and there is an election on the distant horizon.

Yet the then-Ingraham administration did not interfere when Kerzner International was forced to relinquish ownership of Atlantis and the One & Only Ocean Club via the debt-for-equity swap with Brookfield Asset Management, even though it could have done so. What makes Baha Mar more special?

Either way, the Government’s approach means both its handling of the Baha Mar saga, and the ultimate outcome, are likely to become key election issues?

What are likely to the outcomes of the Supreme Court hearings?

Uncertain. Wouldn’t like to be in Justice Ian Winder’s shoes.

Let’s be clear: If the Government’s bid to appoint provisional liquidators to take over Baha Mar succeeds, then Sarkis Izmirlian and his family will be out, potentially costing them their entire $850-$900 million investment.

It’s certainly legitimate to ask whether Prime Minister Perry Christie - via the winding-up petition - is showing the depth of his gratitude to a man (and family) who, if court documents are accurate, he personally sought out to redevelop a dying Cable Beach into a tourism mecca.

Few, if any, investors would have stuck at the Baha Mar project for the 13 years that Mr Izmirlian has done, and all the time and money this has entailed. He and his family have borne most of the risk, and had several opportunities to walk away if they had so chosen.

Mr Izmirlian could have done so in 2007, when Mr Christie and his first administration failed to sign-off on the various land and road ‘side agreements’ just prior to that year’s general election, seemingly fearing a loss of votes should the arrangements become public.

He could have done so again in 2009, after Baha Mar’s initial partner, Harrah’s Entertainment, walked away following its ownership change and fears about the global economic slump.

But no, Mr Izmirlian stuck at it in his bid to give Mr Christie the legacy he craved: A Cable Beach to tank alongside the ‘legacy’ that Atlantis had given to his predecessor, Hubert Ingraham. Mr Izmirlian eventually managed to find the necessary financing from China, little realising that deal would be the source of the present predicament.

Cutting through the Prime Minister’s national address last Thursday, no one should be fooled by his statement that the interests of Baha Mar (meaning the Izmirlians) will be protected by the appointment of provisional liquidators under the supervision of the Supreme Court.

The Government’s playbook is clear. Get the PricewaterhouseCoopers (PwC) team in. They will end the Delaware Chapter 11 proceedings, ensuring Baha Mar is brought under the control of the Supreme Court - an advantage for the Government and China, but not Mr Izmirlian.

The PwC team will then work with China Export-Import Bank, as financier, and China Construction America, as contractor, to come up with a plan to complete Baha Mar and open it in double quick time. The Izmirlians will be cut out.

Once that happens, the provisional liquidators’ work is finished, and a completed Baha Mar can be passed to China Export-Import Bank as the main secured creditor. The bank can then choose whether to remain as owner, or seek a buyer.

Many observers, including Democratic National Alliance (DNA) leader Branville McCartney, have questioned the almost indecent haste with which the Government filed its winding-up petition with the Supreme Court.

Given the complex issues and deep-rooted dispute between the parties, the Government’s self-imposed 48-hour deadline for all sides to reach an agreement in Beijing last week was wildly unrealistic.

Mr McCartney last week suggested there were likely non-diplomatic protocol reasons for why the Prime Minister did not attend, and he questioned whether the Government’s attendance was effectively for ‘PR purposes’. Its team travelled an awfully long way at the taxpayer’s expense when its winding-up petition strategy appeared to have been ‘pre-programmed’.

The Government’s desire for Baha Mar to be opened as quickly as possible is understandable, given its projected economic impact and employment creation. And there is the spectre of Standard & Poor’s (S&P), and a credit rating downgrade that could reduce the Bahamas to ‘junk’ status, within 90 days.

Clearly, the Christie administration has decided the Chinese have more to offer than their 13-year partners in bringing this dream to fruition. But, in its haste to solve the Baha Mar dilemma, is it in danger of sacrificing long-term sovereignty and the economy for short-term gain?

In choosing to seemingly take China’s side, the Prime Minister appears to be ignoring the fundamental root of the Baha Mar problem: China Construction America, the project’s contractor, failed to deliver on time and on budget.

This sent Baha Mar into the cash crisis that prompted its Chapter 11 filing, and both court-filed documents and interviews with witnesses to the project’s construction confirm there is a case for the contractor to answer. No doubt.

Baha Mar seems to have made life far from easy for China Construction America, a contractor it clearly never trusted from the start in 2011, with allegedly late designs and numerous changes that did not account for extra time and monies. In the absence of trust, it could only head one way: Downhill.

There is more than enough blame to go around over Baha Mar; how it should be apportioned is up to someone else to decide. Yet the Government has abandoned its original role of neutral mediator, sided with a party that is at least partly culpable for the problem, and intervened in spectacular style with its winding-up petition in what is a commercial dispute. All with the seeming goal of ousting Mr Izmirlian in concert with the Chinese.

The Prime Minister appears to be jettisoning a developer to whom he, his government and the country owe so much for sticking at it when others would have quit years ago. The suspicion continues to be that the Government is solidly in China’s camp because it needs Beijing to come through on the economic/investment ‘wish list’ that Mr Christie took with him to Beijing in early January. Translation: The Prime Minister, and the Government’s, re-election chances probably hinge on how much China delivers on, and pi* them off by siding with the Izmirlians on Baha Mar is not what the doctor has ordered when it comes to achieving this particular objective.

Has Mr Izmirlian made mistakes? Definitely. We all do. And one can understand his frustrations getting the better of him, given that he is so close, yet so far, from seeing his 13 years’ effort come to fruition with a project that is, tantalisingly, said to be 97 per cent complete.

He has certainly said too much. The “shoddy workmanship” comment should never have been made in public, as it inspired the Chinese to freeze Baha Mar out and move to take over the project. And the public spats with the Prime Minister and the Government do little credit to either party, only inflaming tensions further and making resolution more difficult.

Yes, there has been provocation. And the Prime Minister and his administration may well be feeling hurt, betrayed, blindsided and ‘stabbed in the back’ by the Chapter 11 filing. But Mr Christie appears to have made a classic mistake: He has taken all this personally.

This is business, and requires cool heads, not emotion. He and his Government also appear to have “wrapped themselves in the flag” by repeatedly raising the issue of sovereignty, calling for the matter to be resolved in the Bahamas rather than Delaware - a tactic likely to be designed to swing public opinion behind the Government (whose team had no difficulty rushing off to China).

Should Baha Mar have been developed in phases like Atlantis? Certainly. Was it too ambitious? Probably. Does Baha Mar need to pay its bills and taxes? Absolutely. Is it too big to fail? No.

While attorneys always work on a ‘twin track’ approach, settlement as well as litigation, it appears that the Baha Mar dispute will now have to be resolved in the courts. That will do nothing for achieving the objective all parties wants: Getting Baha Mar open and completed as quickly as possible. In fact, a protracted legal battle may well push any opening back into 2016 at the earliest. Yes, Baha Mar will open, but under whose ownership and when still have to be answered.

Yes, China has much to offer the Bahamas. It is an economic powerhouse, and a potential source of much trade, investment, employment and financial services and tourism business. The Government would be foolish to ignore such opportunities, and China is key to Baha Mar, not least because the China Export-Import Bank has a $2.4 billion mortgage secured on the Cable Beach real estate.

But the Bahamas must remain grounded in reality and develop a long-term strategy. These are state-owned Chinese entities it is dealing with, and their investment is dictated by Beijing’s geo-political strategies. China is still effectively a one-party dictatorship, and the Communist Party’s tentacles often run deep into all state-owned businesses.

The investments by Hutchison Whampoa in Freeport, and China Construction America at the British Colonial Hilton, are fine. These are private deals. But the Government should be very careful about giving the keys to downtown Nassau’s redevelopment to the Chinese - it would give the Beijing government too much sway over this economy.

This leads back to Baha Mar, and the question of whether the Government may sacrifice the long-term for short-term gain. Prime Minister, it’s your call, but be careful.


tribune_reader 9 years ago

Very good article. Wish there more journalists around like this.

jus2cents 9 years ago

RE: 'China Construction America at the British Colonial Hilton,' what year was this deal done? And how much $$$ was it purchased for? what is the plan/layout? Did it include the South Ocean Golf Course too? I thought they were tied together, I could be mistaken obviously missed a few things!

afficianado 9 years ago

The prime minister is daft and weak.

EnoughIsEnough 9 years ago

excellent article. Nice to know that there is at least one great journalist on the island! more articles like this along the way would be so appreciated.

Sunshine12 9 years ago

Yes! Excellent article! What a shame and as yesterdays editorial notes " What NEW foreign investor would even think twice about EVER putting some money into this country??" Plenty of politicians and lawyers lining their pockets!

ObserverOfChaos 9 years ago

Wow, the most balanced honest evaluation of this situation I've read in months! Kudo's. Too bad this isn't read by all parties involved...especially the talking heads we have in govt!

ac8663 9 years ago

Can't you all see the rush for the proposed opening time being October 31st. That will be right in time for their November convention to break in the convention center and to brag about their accomplishments with the success of BahaMar.

DreamerX 9 years ago

Remember my fellow readers. Whether you agree or disagree with the spin provided by this article, this is more of an opinion piece than a reporting of facts.

So be careful in giving out cheers of "good reporting" as it may help to skew your ability to discern between the two.

SP 9 years ago

Regardless Of It All, Just Sick And Tired Of Being Sick And Tired Of The PLP And FNM

Sign in to comment