The Tribune

By NEIL HARTNELL Tribune Business Editor KERZNER International (Bahamas) chief executive yesterday described fears that the company's $2.5 billion lenders would look to foreclose or place the company into bankruptcy as "very far fetched", following Brookfield Asset Management's decision to "terminate" their $175 million debt-for-equity swap. George Markantonis, who is also the company's president, told Tribune Business that any move by Kerzner International's lenders to foreclose on the mortgage-backed loan notes they held would see those institutions "lose". Faced with a such a potential loss to their lending exposure, such action was thus unlikely. Reiterating that the jobs of Kerzner International's 7,500-8,000 Bahamian employees would not be impacted by the ongoing turmoil among Kerzner International's debt holders, who all continue to jockey for position and fight to protect their interests, Mr Markantonis effectively dismissed the possibility of a foreclosure or bankruptcy resulting from the collapse of his company's proposed agreement with Brookfield. "That, to me, is very far fetched," he replied, when Tribune Business raised the issue, "because all the lenders will lose, and lenders are not in the business of losing." Andrew Willis, a spokesman for the Toronto-based asset manager, yesterday confirmed to Tribune Business that Brookfield had cancelled the proposed deal, which would have seen it swap some $175 million in debt owed to it by Kerzner International for 100 per cent ownership of the Atlantis and One & Only Ocean resorts in the Bahamas, and the One & Only Palmilla in Mexico. It took this decision after two other 'junior' hedge fund lenders to Kerzner International, in the shape of the Trilogy Portfolio Company, Canyon Value Realisation Fund, Canyon Value Realisation Master Fund, and Canyon Balanced Master Fund, on Friday successfully obtained a temporary restraining order from the Delaware Chancery Court that barred Brookfield from closing the deal with Kerzner. "There's been some legal filings today," Mr Willis told Tribune Business. "On Friday late afternoon, a US judge had granted these two hedge funds a temporary restraining order and, as a result, we've terminated the offer to acquire the three properties and are reviewing all our options." He declined to comment further. Asked about any possible fall-out for Kerzner International's Paradise Island operations as a result of the Brookfield deal failing to conclude, Mr Markantonis said of the lender situation: "I really am not in that circle of discussion. "It doesn't really affect us one way or another. It's really between Brookfield and the other lenders. There's no impact on operations, and we don't spend our time fixated on the news of the hour." He later added in a statement sent to Tribune Business: "No one at Atlantis is going to lose their job as a result of this transaction. We are a busy resort, looking after our guests, maximising our returns and taking care of our affairs both locally and internationally." However, yesterday's developments effectively send both Brookfield and Kerzner International, not to mention the other lenders, back to the drawing board or square one when it comes to working out a resolution for the resort developer's $2.5 billion debt mountain. Among the options said to be being mulled yesterday were for the two Paradise Island resorts and the Mexico property to be placed into a constructive trust. This would insulate them from the fighting among the lenders, enabling Kerzner International to retain ownership and manage them free from distractions while a new arrangement over the $2.5 billion debt burden was hammered out. The option might also allow Brookfield to go ahead with a formal foreclosure, but Raymond Winder, an accountant and the Bahamas' chief World Trade Organisation (WTO) negotiator, yesterday said the constructive trust plan might not be in the Bahamas' or Kerzner International's best interests. He explained that it would still raise issues of who was in charge, making decisions and providing the financing for continuing capital expenditure on Paradise Island. Another option is for Brookfield and the creditors to simply work out an arrangement between themselves, possibly involving Kerzner International, that would satisfy all parties. While foreclosure on the mortgage notes or bankruptcy remains an option, as Mr Markantonis said it is not likely to be viable. This newspaper revealed yesterday that an appraisal conducted on Brookfield's behalf valued Kerzner International's Paradise Island assets at $3 billion, but the likely realisation from any sale would be less than $2.31 billion - not enough to cover the collective $2.5 billion owed. Tribune Business understands that an extensive report, accumulated over a six-month period, was presented to Kerzner International's lenders on the options available to them after the May 2011 loan default and the impending maturity deadline. None of the options was found to be appealing, and the best course of action decided upon was to keep talking to Kerzner International. It seems likely that the Delaware lawsuit filed by Trilogy Portfolio Company, Canyon Value Realisation Fund, Canyon Value Realisation Master Fund, and Canyon Balanced Master Fund was largely designed as a negotiating/leverage tool, aimed at forcing Brookfield Asset Management to come to the table and negotiate with them in good faith. All the lenders want to be made hold, meaning they want to recover every cent owed to them by Kerzner International. The main complaint by the lawsuit plaintiffs, though, was that Brookfield had effectively jumped the creditor queue by negotiating the $175 million debt-for-equity swap with Kerzner International, and that the proposed terms it was offering them - a two-year maturity extension to September 2013, at a lower interest rate and with "watered down" guarantees compared to the ones they previously enjoyed - did not benefit them. The two junior lenders, represented by the four funds, had accused Brookfield of "brazen self-dealing" and breaching its fiduciary obligations to other lenders. As 'Special Servicer', the Toronto-based asset manager was alleged to have an obligation to administer the $2.5 billion loan in such a way as to maximise the recovery possibility for all lenders. Delaware district judge Donald Parsons seemed to agree, his temporary injunction ruling on Friday preventing Brookfield from closing its Kerzner deal at least until January 27, when the temporary injunction hearing would have taken place. "If the proposed transaction is allowed to close, plaintiffs stand to lose the benefit of contractually negotiated rights related to their priority relative to other participants, as well as contractual rights related to their relationship with the borrower," Judge Parsons said in his ruling. This seems to have forced Brookfield's hand in making yesterday's decision not to proceed with the deal.