The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar yesterday formally promised to repay all debts owed to the Government and Bahamian creditors, while simultaneously threatening its contractor with the loss of its entire $150 million equity investment.

The developer’s Chapter 11 restructuring plan, filed with the Delaware Bankruptcy Court, also proposes to ‘tear up’ the contract the $3.5 billion developer has with China Construction America (CCA), and requires its lender to take what is known in financial terms as ‘a haircut’.

The plan, which Baha Mar and all Chapter 11 petitioners must file to ensure they continue to receive US legal protection, discriminates in its treatment of Bahamian creditors and the Chinese.

While it promises to make the Government, Baha Mar employees and private Bahamian companies ‘whole’, repaying 100 per cent of the debts owed to them, the restructuring plan effectively ‘wipes out’ CCA and will “impair” the security that the China Export-Import Bank currently holds for its $2.45 billion loan facility.

Bahamian financial industry contacts who viewed the proposal yesterday told Tribune Business that it would set the stage for another “very good fight” between Baha Mar and its Chinese partners, with the latter unlikely to take the proposed treatment lying down.

The developer’s restructuring plan, which outlines how it intends to emerge from Chapter 11 bankruptcy protection as a solvent entity, has to first be approved by the Delaware court.

Both China Construction America and the China Export-Import Bank will have the opportunity to object, and file alternative restructuring plans, which the court must consider.

“There’s going to be a very good fight,” one accounting source, speaking on condition of anonymity, told Tribune Business of the Baha Mar plan.

“You have to have a plan that will be successful at the outset. You can’t give the court something that will fail from day one.”

They added that it was common for US bankruptcy courts to require lenders to “share the burden” of restructuring by taking a “hair cut” on the sums owed to them by the troubled company.

“It would be a little haircut at the level where they [Baha Mar] can start operations and get going again,” the source said. “This [the Chapter 11 restructuring plan] generates a big fight, and forum becomes important. We’re in for a bit of a battle.”

Dionisio D’Aguilar, a Baha Mar director, has previously told Tribune Business several times that Sarkis Izmirlian, the project’s principal, had repeatedly pledged to make China Export-Import Bank “whole” regardless of how the dispute was resolved.

This, though, is contradicted by Baha Mar’s restructuring plan, which says that China Export-Import Bank’s existing $2.45 billion loan debenture will be “impaired” if the Delaware court approves it as is.

Unless Baha Mar’s main debt financier agrees to “less favourable treatment”, it will receive what is described as the ‘New China Export-Import Bank facility’.

While this will also be secured on Baha Mar’s resort and real estate assets, the Chapter 11 plan implies that the sum involved will be less than $2.45 billion - meaning that China Export-Import Bank will not recover 100 per cent of the original loan if the plan is approved.

“The bank gets impaired, but the question is to what extent of the $2.45 billion,” one financial/investment analyst, speaking on condition of anonymity, told Tribune Business.

Baha Mar’s restructuring plan will likely reinforce Chinese suspicions that it is seeking to use the Chapter 11 process to shed some of its debt burden, knowing the principal and interest repayments - greater than those that sank Kerzner’s Atlantis ownership - will simply be unsustainable whenever operations start.

Meanwhile, the financial analyst said: “The Government comes out clean, the employees come out clean, the Bahamian creditors come out clean. They get 100 per cent.

“What this [restructuring plan] is saying is that Baha Mar wants to maintain good relations with the Government, and that it was never the intention not to pay the employees and local creditors.”

Baha Mar not surprisingly reserved its harshest treatment for CCA, who it blames for failing to complete the $3.5 billion project on budget and on time, forcing it to seek Chapter 11 bankruptcy protection from its creditors.

The proposed restructuring tears up both the construction contract with CCA, and the investment agreement with its parent, China State Construction Engineering Company.

In particular, the plan calls for all existing Series A preference shares in Baha Mar Ltd to be “cancelled”, thus impairing them.

Given that these securities were what China State Construction Engineering Company invested in for its $150 million equity stake in Baha Mar, the plan threatens the contractor with the complete wipe-out of this position.

“Each of the debtors’ [Baha Mar’s] contracts with CCA, including the main construction contract, shall be rejected,” the Baha Mar plan said.

It added that any claims asserted against Baha Mar by CCA would be “subject to set-off, subordination, recharacterisation, disallowance and other remedies to be determined by the Bankruptcy Court in respect of, among other things, CCA’s inequitable conduct”.

Baha Mar’s initial Chapter 11 filings pegged the debt owed to the Chinese contractor at $72.5 million, although it acknowledged that CCA was claiming some $140 million against it.

The restructuring plan, if approved in its current form, allows for the possibility that some CCA claims may be approved, but appears to ‘cap’ the total payable at $40 million.

This is described as a ‘condition precedent’ to Baha Mar executing the restructuring plan should the Delaware court approve it as is, meaning that if CCA claims greater than $40 million were allowed, it could impair the developer’s ability to move forward.

A similar condition is that the total general unsecured claims against Baha Mar do not exceed $125 million.

Should CCA and China State Construction Engineering Company agree to “less favourable treatment” or have their claims admitted, the Baha Mar plan envisages them receiving a promissory note (an IOU) equal to the sum owed to them.

Baha Mar’s plan, though, retains its rights to take legal action against CCA over the $192 million claim in the UK High Court and in arbitration.

And the developer also wants to be able to negotiate with CCA’s sub-contractors directly to resolve their financial claims - something that will be vital to ensuring Bahamian contractors and construction professionals receive 100 per cent of what is due to them.

Tribune Business’s financial analyst contact, who has reviewed the Baha Mar proposal, said it seemed as if “new capital and outside ownership is coming in”.

This is because all common shares in Baha Mar Ltd, the actual project company, will be cancelled. And BML Properties, which owns 100 per cent of Baha Mar Ltd, is to be dissolved and wound-up according to yesterday’s filing.

In its place, the documents said: “Baha Mar shall issue or authorise the issuance of the New Baha Mar Common Equity.” And new debt financing, called ‘Exit Financing’, will be put in place “in an amount sufficient to complete construction of the project, open the project and provide adequate working capital for the project on terms and conditions acceptable to the debtors [Baha Mar”.

All this suggests that Baha Mar may be lining up alternative financiers to the China Export-Import Bank, and that Mr Izmirlian and his father, Dikran, are working to an as-yet unknown plan.

And that includes fully compensating all Bahamians, including the $59 million owed collectively to the Government and its agencies.

“Most notably, the plan does not impair the legal or equitable rights of Bahamian creditors or the Government of the Bahamas, whose claims will simply ‘ride through’ the Chapter 11 cases,” Baha Mar said.

“The debtors submit that timely confirmation of the Plan is unequivocally in the best interests of their creditors and estates.

“The plan presents the best available alternative to allow for the expeditious resumption and completion of construction of the project, thereby capturing the project’s significant value as a going concern for the benefit of all interested parties, including the economic welfare of the Bahamas.

“Once completed, the project is projected to generate nearly 5,000 new jobs and have an annual payroll in excess of $130 million, representing 12 per cent of the GDP of the Bahamas.”

The only other creditor class set to be “impaired” are US companies with unsecured claims, although they will receive a 100 per cent cash payout or promissory note if they agree to a ‘hair cut’.

Baha Mar’s proposal will likely give their Chinese partners even more incentive to push for the dismissal of the Chapter 11 case today before Judge Kevin Carey in the Delaware Bankruptcy Court.

The Chinese and the Government have been pursuing a two-pronged strategy to wrest the Baha Mar dispute back to the Bahamas, and secure this jurisdiction as the primary forum for determining the dispute.

Should the Delaware bid to dismiss the Chapter 11 case fail, they will turn to the Supreme Court and the Government’s winding-up petition, which awaits a ruling by September 4.

After winning the battle to block Supreme Court recognition of the Chapter 11 case in the Bahamas, the Government and the Chinese will now be hoping that the winding-up petition succeeds.

Should the provisional liquidator be appointed in the shape of Ernst & Young, it would then move to end the Chapter 11 case.