The Tribune

It will return. Make no mistake about it. With $2.5 billion worth of debt past due and in default, Kerzner International's seven lenders will not let the situation lie. It is a question of when, rather than if, the ownership of the Atlantis and One & Only Ocean Club resort's change hands. Brookfield Asset Management may have been forced to abandon its $175 million debt-for-equity swap after the fuss kicked up by several of its fellow junior Kerzner lenders, but Paradise Island still stands on the threshold of change. The "debt-for-equity" structure, whereby Brookfield or other lenders agree to "forgive" the debt owed by Kerzner International in return for equity ownership of the latter's Bahamas resorts, remains the most viable way out for all concerned. It is bound to come again, albeit in some revised form. For it is not in the parties' interests - not even those of Sir Sol and his company - for the current situation to linger on indefinitely. Whether an ownership "debt-for-equity" swap is in the interests of the wider Bahamas, and Kerzner International's 7,500-8,000 strong workforce, is an entirely different matter. The road to today's impasse started the fateful day in 2006 when Sir Sol and his late son, Butch, decided to leverage the equity value they had spent a decade building at Paradise Island to fund the $3.8 billion buyout of Kerzner International, taking it private, an endeavour also intended to finance the global expansion of the Atlantis brand to, among other places, Dubai. It must have seemed like a good idea at the time. The $1 billion Phase III expansion was in full swing, the US and global economies were going gang busters, and Atlantis was flying high from ever-increasing profits. Delisting from the New York Stock Exchange also meant the Kerzners no longer had to answer to Wall Street, and the occasional investor grumbles about lack of dividends, while also increasing the equity stakes held by father and son - allowing them to reap greater rewards from their risk-taking and entrepreneurial efforts. It was a calculated risk/gamble that, ultimately, appears to have doomed Kerzner International's ownership of its prized Bahamian assets. The first signs that all was not well on Paradise Island should have become apparent to most Bahamians in late 2008 when Kerzner International laid-off 10 per cent - some 800 - of its Bahamian workforce. Yes, the recession was largely to blame, but it was a combination of forces at work - the downturn, coupled with the $3.8 billion debt pile, and the covenants and financial ratios Kerzner International had to maintain. When revenues fell off a cliff, costs had to be cut, and drastically, to ensure the company was not left at the mercy of its lenders. Fast forward to the present. Kerzner International, after using the three one-year extensions available to it under the terms of the $2.5 billion securitised loan, was able to put off the principal maturity until September 9, 2011. The day of reckoning had finally arrived, with Sir Sol and his advisers unsuccessful in all attempts to refinance or extend the loan. Their last-ditch offer came in May 2011, with a two-year extension that would require Kerzner International to pay a higher interest rate, increase their equity capital and make a principal downpayment to the lenders. Step forward Brookfield Asset Management, which was said to have played "hard ball" in rejecting that May 2011 Kerzner offer. The Toronto-based entity stepped forward with a proposal that seemingly might get everyone off the hook, until two of its fellow lenders stopped it in its tracks. The fight between Kerzner International's lenders has been something of a "crash course" introduction for many Bahamians to the hard-nosed, "dog eats dog" world of major private equity and hedge fund players, where no prisoners are taken as each side looks out for number one, namely maximising their own upside interests. That is what the Delaware court case was all about. Upset that Brookfield had effectively jumped ahead of them in the creditor queue, and that its arrangement might jeopardise full recovery of the collective $112 million owed to them, the junior lenders succeeded in blocking the transaction in court, forcing the Toronto-based asset manager (hedge fund/private equity fund, depending on your viewpoint) back to the drawing board for the time being at least. What was also particularly disappointing, but not surprising, given the season we are in, is how the main political parties have brought the fate of Atlantis and the One & Only Ocean Club into their politics (should that be "politricks"?), in a bid to win advantage with the Bahamian electorate. First came Prime Minister Hubert Ingraham's attack on his predecessor, Opposition Leader Perry Christie, for allowing Kerzner International to over-leverage its Paradise Island assets to the tune of $2 billion-plus. The Prime Minister's charge has some merit, as Tribune Business understands the Government was previously warned about allowing the Paradise Island assets to be leveraged to raise debt capital. But, given Kerzner International's track record of success, its ownership of the Bahamian economy's commanding heights, and the "boom" economy being enjoyed at the time, would Mr Ingraham have found it easy to resist Sir Sol's application for government approval? Rejecting it may have sent a bad signal to other investors, both existing and potential. It is hard to see how either party, PLP or FNM, would have reacted differently when Kerzner International came to them. As for Mr Christie, he predictably came out swinging and scaremongering, warning that "thousands of Bahamian jobs are at stake" in a bid to alarm Atlantis workers - and others - into voting for the PLP. He also hammered Mr Ingraham for failing to disclose to the Bahamian people that the Brookfield deal was on the verge of collapse. With all due respect to Mr Christie, and the Bahamas and its people, this matter is now out of this country's hands. It is being played out in the conference rooms of New York, Toronto and, possibly, Delaware, as Kerzner International's lenders hunker down with their teams of investment bankers and attorneys to hammer out the way forward. With that $2.5 billion debt already in place, there is little the Government can do for the moment but wait on an application to be submitted to it. And, given such an international setting, the Government would not have been among the first to know the original deal had collapsed, although it would likely have been informed fairly quickly. The situation is now outside Kerzner International's control, and the Prime Minister's job is not to immediately relay the "news of the day" to people right as it happens. It is unrealistic of Mr Christie to expect this, and given that he once held the job, he should know better. As for the 7,500-8,000 direct jobs bound up with Kerzner International's Paradise Island operations, the Prime Minister was correct to say there will be no lay-offs ....... yet. The latter is the key word. Any ownership change will not result in immediate staff cuts, as Brookfield and the other lenders know they need to maintain the Atlantis and One & Only Ocean Club assets, and their existing high service and performance standards. Cutting too deeply will jeopardise this and would, frankly, be stupid. It will also endanger their recovery prospects, too. If, not when, the ownership of the Paradise Island resorts change, it is from 2013-2014 out that will be key in determining whether there are staff cuts. If Atlantis and the One & Only Ocean Club meet the profit and financial targets set by their new owners, there will likely be no problem. It is only if they fall below these that difficulties might occur. Finally, there came the Democratic National Alliance (DNA). Branville McCartney lost no time in blaming his two rival leaders for the situation on Paradise Island, although he did not state what he would have done differently. And, in a naked display of political pandering in an attempt to secure trade union votes, DNA party chairman Mark Humes suggested that unions be included in all negotiations with major developers - something that might well cause them to run a mile. Indeed, the whole world and his wife seem to have weighed in on the Kerzner International/Brookfield situation. But the "limbo" that Atlantis and the One & Only Ocean Club currently appear to be in will not last for long. The lenders will not allow it, and right at this very minute are probably going through their full range of options. The $230 million costs involved in foreclosing on the mortgage held over Paradise Island, and the potential $300 million Stamp Duty liability to the Government, mean that foreclosure or placing Kerzner International into bankruptcy are not realistic, viable options from the lenders' point of view. One idea seemingly being floated would be to preserve the status quo by placing Atlantis and the One & Only Ocean Club into a constructive trust, held for the benefit of all parties involved. This, on the face of it, might be the best option for the Bahamas, as this nation's interests are clearly best served by Kerzner International retaining ownership, not just management control. Kerzner International is a known commodity, has successfully operated the Bahamas' resort "crown jewels", employed thousands of Bahamians, and invested millions in both developing both its properties and the local community. Financially-led owners are unlikely to do all of that, let alone successfully. Hell, who knows? If the resorts are placed in trust, and the lenders prove unable to resolve their differences, could this ultimately enable Kerzner International to recover in line with the world economy, and put itself in a position to repay that debt? With all due respect, that is straw clutching and unlikely to happen. The lenders, who currently have to live with a defaulted loan that is still operating on the old terms, will not be inclined to let the situation drag on. All of which points to Brookfield's debt-for-equity proposal being revived, albeit in a revised format. To end junior lender opposition, it has several options. Together with the more senior lenders, Brookfield could simply take out the two who, collectively, hold less than 5 per cent of the outstanding debt. Alternatively, it could include them in the "equity" portion of the swap, or revise the terms of a loan extension that was previously rejected. A debt-for-equity swap would certainly suit Kerzner International. Sir Sol's manner and body language indicates he wants to be free immediately of the burden that has plagued him and his company for the past three years, freeing him to do what he does best - resort development and management. But, even if a deal with Brookfield or whoever finally goes through, that is not necessarily the end of the debt story, as it is certainly possible the new owners may be unable to pay out the remaining lenders whenever an extension matures. The Bahamas' influence over the lenders is next to zero until their differences are sorted out. Once they come with a proposal, much will hinge on the Government doing its best to safeguard Bahamian interests, and it does have some leverage given the slate of approvals that will be required. Will it be able to block any proposal outright? Possibly, but the risks attached could be great, both for the Bahamas and Paradise Island. Watch this space. The only certainty is uncertainty. The times are a-changing, and it is impossible to give the Bahamas and Kerzner International's employees a 100 per cent guarantee that everything will be fine in the future. The only thing both can do is give their 100 per cent best to ensure that whoever ends up owning the Atlantis and One & Only Ocean Club resorts is "blown away" by the success of their investment.