The Tribune

By NEIL HARTNELL Tribune Business Editor SOME $230 million in costs would be incurred just to foreclose on Kerzner International's Paradise Island properties, a Delaware judge questioning why Brookfield Asset Management should be the only one to potentially benefit from the "upside potential" of Atlantis and the One & Only Ocean Club. In granting two of Kerzner International's junior lenders the temporary restraining order (TRO) they sought to prevent Brookfield's proposed $175 million debt-for-equity swap from going ahead, district judge Donald Parsons questioned why the Toronto-based asset manager, as the most junior of the seven creditors, should be the only one to benefit from equity ownership of the "uniquely valuable" Paradise Island resorts. Noting that the deal reached between Brookfield and Kerzner International would enable solely the former to acquire 100 per cent of the resort developer's equity, Judge Parsons said the more senior lenders would thus be "permanently deprived" of participating in any increased future profits generated by Atlantis and the One & Only Ocean Club. Other gems revealed by the Delaware court ruling are: * Judge Parsons refused the demand by the Brookfield investment vehicle holding Kerzner's debt that the other two junior lenders post a $230 million bond if a TRO was granted. This sum was sought on the grounds it was equivalent to the cost of foreclosing on the Paradise Island resort properties * The Stamp Tax payable to the Bahamian government if the lenders foreclosed on Kerzner International's $2.5 billion loan, assuming a 12 per cent rate, would be $300 million. Based on a $3 billion valuation of the Paradise Island assets, it could even rise to $360 million - a sum that would effectively wipe out the national deficit * Brookfield alleged that if there was a bankruptcy, its BREF One vehicle would guarantee up to 20 per cent of the loan principal sum due to the other lenders. No evidence was offered to support this * Wells Fargo, the 'Special Servicer' for Kerzner International's $2.5 billion loan, asked the Delaware court for permission to keep working on the $175 million debt-for-equity swap even if the TRO was granted. This suggests this deal structure remains very much alive as a possibility. Ruling that the two junior lenders, represented by Trilogy Portfolio Company, Canyon Value Realisation Fund, Canyon Value Realisation Master Fund, and Canyon Balanced Master Fund, would be "irreparably harmed" and lose their rights if the Brookfield deal - as originally conceived - stood, Judge Parsons questioned why the most junior lender should receive all the benefits of being equity holder if Kerzner International's financial performance turned around. "Although defendants [Brookfield] trumpet the merits of the proposed transaction over a foreclosure on the property, their position is not very persuasive, because the total range of restructuring outcomes is not binary," the Delaware judge found. "Thus far, defendants have failed to identify any contractual provision or legal principal that would explain why they, alone, should enjoy the opportunity to assume control of the borrower [Kerzner] as part of the proposed restructuring of the loan." Judge Parsons' ruling here touches on the fact that, for a $175 million debt outlay, under the terms of the debt-for-equity swap Brookfield would have picked up Paradise Island assets carrying an appraisal value more than 17 times' higher ($3 billion). That would rank as a 'steal' in most people's estimation. Yet Brookfield is the most junior lender, so why should it 'leapfrog' all the others to take a preferential position as sole equity holder, able to receive 100 per cent of the dividends should Kerzner International's bottom line improve in line with a global economy staggering towards recovery? "As plaintiffs' [junior lenders] fervent opposition to the proposed transaction illustrates, the opportunity to benefit from the upside potential of the borrower [Kerzner] may be a uniquely valuable asset in which the more senior participants may have a legitimate claim to participate," Judge Parsons noted. "Indeed, by entering into a participation other than the most junior participation held by [Brookfield's] BREF One, each senior participant presumably thought it was acquiring the opportunity described in the agreements to receive the benefits of the loan in order of their priority. "If the proposed transaction is allowed to close, the participants senior to BREF One permanently may be deprived of their opportunity to receive the borrower's equity and participate in the management and upside potential of [Kerzner], which may prove lucrative in the future." The Delaware judgment gives a good indication as to why foreclosing on the Paradise Island mortgage, or placing Kerzner International into bankruptcy, is not a viable option. Especially given that there are some $230 million in foreclosure costs involved. Under the Delaware Chancery Court's rules, parties successfully obtaining a TRO are required to post a bond to cover costs/damages incurred by the other party in the event that they are "wrongfully enjoined or restrained". Brookfield had sought the payment of $230 million, but Judge Parsons awarded just $100,000. "Here, defendants have not submitted any factual evidence to support their contention that the bond should be set at an amount equivalent to the costs associated with a foreclosure on the property," the judgment said. Given that there was no evidence to suggest Brookfield would incur major costs as a result of delaying the now-dead (for the moment, at least) $175 million debt-for-equity swap, Judge Parsons said: "I reject defendant's bold contention that the bond should be set at $230 million. "Instead, I find that a relatively modest sum of $100,000 secured should be required in the circumstances of this case, which include defendants' complaints that plaintiffs seek plainly unreasonable and burdensome discovery and otherwise will subject defendants to potential losses if the TRO is granted." The judgment also shows just why Brookfield/Kerzner were so keen to secure a waiver, or discount, on Stamp Tax payable to the Government on their deal. "The Brookfield defendants assert in their briefs that a foreclosure on the property valued at $2.5 billion could result in a Stamp Tax at the statutory rate of 12 per cent. At that rate, the Stamp Tax for a foreclosure could be as high as $300 million," the judgment read. Zhivargo Laing, minister of state for finance, has now twice declined to comment on the Stamp Tax issue when contacted by Tribune Business. Under the terms of the now-terminated deal, Brookfield's BREF One vehicle would not have been required to maintain a minimum $500 million net worth, as Kerzner International had been, according to the Delaware ruling. In addition, the three Kerzner entities holding the $2.5 billion debt would have been responsible for paying all the Stamp Tax. Kerzner would then have to reimburse those companies, the ones that hold Atlantis, One & Only Ocean Club and other Paradise Island real estate, for that payment over a multi-year payment.