The Tribune

By NEIL HARTNELL 

Tribune Business Editor 

nhartnell@tribunemedia.net

BAHA Mar’s main contractor is alleging the project’s “insolvency was inevitable” even if the original March 27, 2015, opening deadline was met due to inadequate revenues and inability to access “key money”.

China Construction America (CCA), in legal filings following a two-week New York trial over Sarkis Izmirlian’s fraud and breach of contract claim, asserted that Baha Mar’s financier would have ultimately “foreclosed” on the project in any event because it would have been unable to make the necessary repayments on the $2.45bn debt.

The Chinese state-owned contractor, which Mr Izmirlian blames for the liquidity crisis that triggered the events leading to his ouster as developer because CCA missed the target opening date, also argued that Baha Mar would have required a new $300m credit facility to continue because it was unable to access “key money”.

This represents funds that hotel brands - in Baha Mar’s case, the Grand Hyatt, SLS and Rosewood - pay upfront to secure their place as the resort operator.

However, CCA claimed that Baha Mar had long been in “severe financial trouble” because it had already drawn down $1.98bn from the credit facility provided by main lender, China Export-Import Bank, as at November 2014.

The bank, like CCA, is owned by the Chinese state. The contractor argued that Mr Izmirlian and Baha Mar fell into “a liquidity crisis of its own making”, while arguing that it had completed 97-98 percent of the Cable Beach mega resort by the March 27, 2015, deadline.

However, it blamed Mr Izmirlian and Baha Mar for the inability to welcome paying guests by that date by accusing them of “bombing their own deliverables”. CCA asserted that it had made “extraordinary efforts” to meet the opening deadline with one of its senior Bahamas-based executives, Tiger Wu, “even sleeping in his office”.

That assertion is likely to be greeted with a mix of disbelief and scepticism by Mr Izmirlian and his team. And, even after the original developer’s ouster, CCS asserted it “ultimately received no more than its original contract sum for completing” Baha Mar despite being paid an extra $700m for this.

Detailing Baha Mar’s road to Chapter 11 bankruptcy from its perspective, CCA alleged: “Unbeknownst to defendants, Baha Mar was facing severe financial trouble. By November 2014, Baha Mar had drawn $1.98bn from the credit facility and had pre-sold only a small fraction of the $570m worth of con- dominiums that its capital model assumed would be needed to repay the loan.

“Baha Mar also faced over $100m in short-term interest payments starting in April 2015, and owed CCA Bahamas $98 million as reimbursement for sub-contractor payments and costs related to Baha Mar’s hundreds of CCDs.” The latter are construction change directives where original construction plans are altered and changed, which can result in extra costs and time delays.

Following the November 2015 meetings in Beijing, which were intended to resolve all disputes between Baha Mar and CCA, and bring the mega resort to completion on target, CCA alleged: “Between November 2014 and March 2015, CCA Bahamas made extraordinary efforts to meet the March 27 date. Executives worked at all hours on the project, with Mr Wu even sleeping in his office. “CCA Bahamas increased its total workforce on net by over 1,000 workers. The project workforce peaked at over 6,000 in February 2015. CCA Bahamas facilitated this surge by paying overtime and idle-time premiums, and mandating work on holidays.

“Although CCA Bahamas could not legally force workers to stay in The Bahamas, it used financial incentives to convince 800 workers with expired contracts to remain on the project rather than leave for Chinese New Year, as they previously intended. CCA Bahamas undertook these measures at its own expense, not Baha Mar’s.”

CCA accused Baha Mar of stopping monthly payments for work done in February 2015, with some $76m owed by May 2015. Asserting that it never stopped working despite not being paid, CCA said: “Defendants did not know that, by February 2015, Baha Mar was in a liquidity crisis of its own making.

“On February 9, 2015, China Export-Import Bank told Baha Mar that it could not draw down further on the credit facility, which Baha Mar needed to fund construction, unless Baha Mar put in $70m additional equity. Baha Mar conceded that it was in a shortfall position when it asked [CCA’s parent] on March 9, 2015, to make a $15m equity shortfall contribution.

“Baha Mar’s request surprised CCA Bahamas because CCA Bahamas had received only about $1.3bn from Baha Mar - well under its $1.9bn contract amount..... Meanwhile, CCA Bahamas completed and turned over 1,600 rooms resort-wide, including almost 900 in the casino hotel, vastly more than the 150-200 Casino Hotel rooms required for March 27,” the Chinese contractor added.

“All agree CCA Bahamas got ‘very, very close’ to achieving the March 27 opening. By then, the resort was 97-98 percent complete. The Bahamian government, however, rejected the fire watch and declined to grant the necessary temporary certificate of occupancy (TCO).

“The resort could not have welcomed paying guests on March 27 anyway because Baha Mar admittedly ‘bombed’ its own deliverables. It did not complete key areas of the fire and life safety systems under its scope of work, which were independent grounds for denying a TCO.

“Baha Mar also failed to complete things it deemed ‘mission-critical’ to opening, including the nightclub, restaurants and spa, and failed to obtain the certificate of suitability needed to open the casino.” As a result, CCA alleged: “Even assuming a March 27 opening, Baha Mar’s insolvency was inevitable.

“Plaintiff would not have gotten the key money by March 27 because Baha Mar had not secured from China Export-Import Bank the subordination, non-disturbance, and attornment agreements (SNDAs) the hotels required. Key money would not have covered Baha Mar’s underfund- ing anyway. As of June 12, 2015, Baha Mar needed a new $300m credit facility to continue the project.

“Baha Mar’s anticipated revenues after opening would not have been enough to avoid insolvency. Baha Mar’s chief financial officer testified Baha Mar would have ‘run a loss for the first one to two years’, and per plaintiff’s own expert’s optimistic outlook, Baha Mar would have operated at a deficit for five years starting in 2017.

“Accordingly, Baha Mar failure to meet its payment obligations under the the China Export-Import Bank loan would have triggered a default, allowing the bank to foreclose.”