The Tribune

By NEIL HARTNELL Tribune Business Editor KERZNER International defaulted on its $2.5 billion loan agreement in May 2011, a lawsuit has alleged, with auditors unable to provide a set of 2010 'unqualified' financial statements for the Atlantis and One & Only Ocean Club's owner. The claims, revealed in a January 4, 2012, lawsuit filed in the Chancery Court of Delaware buy four Kerzner International lenders seeking to block the resort owner's $175 million debt-for-equity swap with Brookfield Asset Management, the most junior creditor, reveals how the Atlantis owner was unable to cope with its debt burden and became over-leveraged after the projected cash flows failed to materialise due to the global recession. The lawsuit alleges that after extending the $2.5 billion loan's maturity by one year for three successive years, taking it from September 9, 2008, to September 2011, Kerzner International and its advisers were unsuccessful with all options they pursued to refinance and restructure the credit facility. "Rumours" in Spring 2011 that it was at risk of tripping on a leverage covenant relating to its credit facilities was another sign of Kerzner International's "financial distress", the lenders alleged. This ultimately manifested itself in a loan default some months later. "In May 2011, an Event of Default occurred under the loan agreement on account of Kerzner International's inability to deliver on audited financials for 2010 without a 'going concern' or similar qualifications," the lawsuit alleged. That is likely to be connected to Kerzner International's debt burden, and the difficulties the company was having in meeting the maturity deadline. While Kerzner International has remained profitable, as have Atlantis and the One & Only Ocean Club, the company and its resort properties have simply failed to generate the projected net income and cash flow increases to enable them to service the $2.5 billion debt load. The lawsuit described Kerzner's "access to cash" as "severely restricted" as a result of the 2007-2008 financial crisis and subsequent recession, together with the $1 billion costs associated with Atlantis, The Palm in Dubai. "Economic conditions improved little between 2008 and 2011 and, as a result, Mr Kerzner and his companies have experienced difficulty servicing and repaying the multi-billion dollar debt that they incurred," the lenders alleged. Kerzner International's 2006 $3.8 billion leveraged buyout, which involved borrowing $3.4 billion in 2006, was designed to finance Paradise Island's $1 billion Phase III expansion as well as take the company private, delisting it from the New York Stock Exchange (NYSE). The borrowings consisted of a $575 million secured credit facility and $2.8 billion mortgage loan, with Sir Sol allegedly confident that Atlantis would enjoy "year after year" of growth and almost double Kerzner International's net income by 2010. The reality was something less than that. Between 2008 and 2009, Kerzner International's net cash flow was alleged by the lawsuit to have fallen by $30 million, with occupancies at Atlantis falling almost 20 percentage points below projections - from an average 80.3 per cent to 61 per cent. By early 2010, net income was alleged to be off some 13 per cent over the prior year. The $2.78 billion mortgage loan, entered into by Kerzner International's Bahamian subsidiaries, was secured by a commercial property mortgage on Atlantis, and other Paradise Island real estate parcels. The loan was ultimately securitised and split between lenders, via mortgage-backed securities. The lenders seeking to block the Brookfield deal are asking the Delaware court to place Atlantis and the One & Only Ocean Club into a constructive trust for the benefit of all lenders.