Giant Nassau resort still not open, facing uncertain future
Originally published at the Cayman Financial Review, 2nd Quarter 2016, Issue No: 43 and posted here with the kind permission of the author.
A crude translation of Baha Mar might be “Low Sea,” and indeed the unfinished mega hotel/casino project on Nassau’s Cable Beach is aground in shallow waters.
Baha Mar is now in the hands of receivers for its major creditor, a Chinese government bank; its originator and equity owner Sarkis Izmirlian has been forced out; and the Bahamas government sees the country’s major potential foreign-exchange earner lying empty and decaying, while Prime Minister Perry Christie’s many optimistic forecasts are simply blowing in the wind.
The semi-circle of towers, the highest is 25 stories, bearing logos of Hyatt and other brand-name hotels, together with casino, 18-hole golf course and ridge-top club house, dominates the purpose-built landscaped highway system that leads from the airport to downtown Nassau and Paradise Island, home of Baha Mar’s long successful competitor Atlantis.
Every airline arrival passenger sees this looming complex of off-white buildings, said to be 97 percent structurally complete, and may wonder why such an eyecatching enterprise now lies vacant except for wandering maintenance staff.
The attached convention center is booked in April to host the annual meeting of the Inter-American Development Bank, but at the surrounding hotels, doors will stay shut except at the years-old Meliá.
Its history tells the tale. Until 2005, the narrow Cable Beach tourist strip consisted of half a dozen hotels of various sizes and styles scattered along the ocean side of West Bay Street, including a grim Radisson (now Meliá) and the bizarrely ugly Windham casino complex.
Then the Izmirlian family, recent arrivals from Switzerland of Armenian descent, entered the local scene, with no hotel experience, but with a vast fortune earned in the tough business of commodities trading. Father Dikran, now aged 89, famed for controlling the world market for peanuts grown in West Africa, and son Sarkis, a U.S. business school graduate now aged 42, first proposed to the Bahamas authorities a plan simply to acquire and improve the existing properties.
Soon they conceived a more grandiose scheme, with the active encouragement of the Bahamas government, ruled by the Progressive Liberal Party led by the then and future Prime Minister Perry Christie. Under the newly coined name Baha Mar, the resort would stretch from the beach deep inland, re-routing West Bay Street and demolishing and relocating several office buildings and a police station, with government kicking in substantial tracts of Crown Land.
Although the Izmirlians committed equity of $800-$900 million, a major partner was needed to provide funding and management expertise for the planned state-of-the art casino and 2,300 hotel rooms stretching over 1,000 acres. The renowned Harrah’s group, owners of Las Vegas Caesar’s Palace, signed a joint venture agreement. Unfortunately, on the eve of closing in July 2008, Harrah’s pulled out, leaving the Izmirlians with nothing but an unsuccessful breach of contract lawsuit in the New York Courts.
It looked like early finito for Baha Mar. But Sarkis began negotiating with Chinese state financial interests, rich with new dollars from the booming economy and eager to invest abroad. Suddenly in 2010, Sarkis appeared in Miami shaking hands with the Chinese Export-Import Bank (CEXIMB), agreeing to a term loan of $2.5 billion, and with the state construction company (CSCEC), which would make an equity investment of $150 million and commit its U.S. subsidiary, known as CCA, to serve as the prime contractor. After tense negotiations over Chinese insistence that CCA be allowed to import some 4,000 Chinese construction workers, the deal was signed, and ground-breaking soon began. Government was happy with the forecast of 5,000 Bahamian employees and about 5 percent contribution to GDP.
We in Nassau watched as new roads were carved out of the bush, barracks for the Chinese were built, and cranes raised hotel towers to the ebullient topping out ceremony in February 2013. Optimism prevailed, despite critics who grouched that the environmental impact will blight the surroundings, that airlift to Nassau will never fill both Baha Mar and the equally sized Atlantis, and that the complex should have been planned in several phases, as was Atlantis. When the first scheduled opening date of Dec. 8, 2014, was postponed, rumblings were heard but were regarded as typical delays for a large project. In February 2015, the prime minister and Sarkis Izmirlian issued a joint statement stifling any doubts by assuring that construction would be completed to allow opening on March 27.
International publicity continued, extolling Baha Mar as the largest single phase hospitality project ever undertaken in the Western Hemisphere and conducting a successful sales campaign for million-dollar condos integrated in the complex.
Thus it came as a rude shock when Baha Mar management with two weeks’ notice abruptly cancelled the opening, publicly laying the blame directly on the Chinese prime contractor CCA for shoddy work and quitting on the job. No future opening date was forecast, and Baha Mar had to reimburse hundreds of potential guests who had committed both room reservations and air-fares, leaving a bitter taste with international travel agents.
CCA promptly riposted that they had not been fully paid for work done and were overwhelmed by change orders issued by the owner. Despite a Dispute Resolution Committee, the conflicting claims were never resolved. This author has been told by an American civil engineer retained to supervise the project that after two years he resigned in frustration, finding the Chinese firm incompetent to handle such a large and complex venture, and unwilling to change their ways. Earning no revenues, but paying operating expenses plus salaries of 2,000 initial Bahamian employees, including many senior staff, management had to plan for the unavoidable financial crunch, and on the last day of June the Baha Mar board of directors decided to file a petition in Delaware U.S. Federal Court for reorganization and protection from creditors under Chapter 11 of the U.S. bankruptcy code, the rational step for any enterprise with vanishing liquidity but solid assets.
Prime Minister Christie expressed dismay at this predictable strategy and, claiming he had been blindsided, initiated a campaign of vituperation against Izmirlian, even expressing doubts about his mental condition. This personal vendetta was continued by two of his cabinet ministers and the chairman of the PLP, who hinted that Izmirlian should be deported because he displayed “contempt for The Bahamas,” and the Attorney-General Allyson Maynard was instructed to put legal obstacles in his way. To become effective locally, the U.S. Chapter 11 proceedings had to be ratified by the Bahamas Supreme Court. When the judicial hearing was held, the two Chinese parties, the bank and the construction company, opposed the motion and were supported by the attorney general, rhetorically claiming that the Chapter 11 process would violate Bahamian “sovereignty.”
Our Supreme Court Justice Ian Winder had no choice but to rule against the Izmirlian motion, despite his offer to provide $80 million of new capital until reorganization could be completed. Two trips to Beijing by the attorney general and her expensive entourage for “high level” negotiations with the Chinese proved predictably fruitless.
After several false starts, government appointed “provisional liquidators” to initiate involuntary winding up under Bahamian law, which the prime minister insisted would speedily permit prompt resumption of work and opening of the resort. In fact, there was no chance of this, since Bahamian bankruptcy, unlike Chapter11, leaves no room for reorganization but permits only the extreme solution of liquidation and prompt seizure of assets by creditors – a solution that destroys Baha Mar as a going concern. The liquidators now have no funds or authority to pursue claims like the $192 million lawsuit by Baha Mar against CCA for construction failure, or the claims of Bahamian creditors, while Deloitte is financed by CEXIMB to protect strictly its own interests.
From that day to the present, CEXIMB became the dominant party without taking any positive steps towards opening. The 2,000 Bahamian employees specially trained by Baha Mar, were released and then paid for three months by government before that controversial largesse came to an end. A skeleton staff was retained for essential electric power and maintenance at a monthly rate of several million dollars, which CEXIMB had to finance with a $50 million advance from another compliant state-owned entity. Bahamian sub-contractors, owed about $74 million, have gone unpaid as have other local creditors. The unique collection of Bahamian art, borrowed from local collectors to display native creativity, has had to be returned to its owners and its curator dismissed. Sarkis Izmirlian and his president, Disney-trained Tom Dunlap, both now replaced by the receiver, have offered their unique expertise to restart the venture, but have been spurned by government and CEXIMB.
Prime Minister Christie has attempted to retain credibility with the Bahamian public by trumpeting his formal demands to CEXIMB to proceed or sell out, but these have fallen on deaf ears. The latest of his many predictions that a sale was “imminent” was bluntly shot down this February when CEXIMB stated that no specific transaction was under consideration and no time-line could be set for completion. Shortly before preparing this article in early March, new revelations surfaced that question his judgment in siding with the Chinese in every dispute.
First, the Bahamas press discovered a memo from contractor CCA in Nassau to its parent CSCEC in Beijing warning of a “crucial dash” to meet the completion deadline, risking “unmeasurable damages to reputation” and a fine of $250,000 per day past March 27 unless drastic action were taken to dispatch 450 additional Chinese workers – a step never accomplished. This internal document was dated Jan. 20, 2015, just three weeks before the prime minister and Izmirlian gave their “assurances” about on-time opening. Its inexcusable non-disclosure misled the parties into incurring millions of expenses and liabilities. Worse, the project’s quantity surveyors reported that CCA over-billed Baha Mar by $200 million-plus for work done before walking off the job in March 2015, without objection from CEXIMB.
Meanwhile, Andrew Farkas, principal of major U.S. real estate developer Island Capital Group, revealed that he and Sir Sol Kerzner, creator and former owner of Atlantis, had approached CEXIMB to help the bank out of its $2.5 million predicament, making several trips to Beijing only to be rebuffed. They were not given a shred of information needed to present a meaningful bid for ownership, joint venture, or management; any proposals were simply answered “no – buy the mortgage at par or pay it off.” Even the vigorous intercession by the prime minister has not led EXIMB to budge from its hard line.
The present stand-off should lead any Caribbean nation and its foreign investors to consider the following lessons:
First, U.S. Chapter 11 provides far better ways to handle a large bankruptcy than the archaic liquidation proceedings inherited from English common law and never modernized in The Bahamas.
Second, don’t retain a prime contractor who is in bed with your bank lender through having the same owner, an oriental state 8,000 miles away.
Ironically, The Bahamas and the Chinese seem locked into a new but similar business embrace. Two years ago a Chinese state property company bought Nassau’s iconic downtown Hilton-managed British Colonial Hotel and several acres of adjacent prime waterfront property. An eight-story parking garage is already under construction, to be followed by a glitzy hotel/commercial/marina complex being marketed as The Pointe (sic). It is being built by many of same CCA executives and workers who simply moved down the road from the abandoned Baha Mar. Citizen reaction to the Christie-approved behemoth is doubtful at best, shocked by the 500 work permits granted for Chinese construction laborers.
The site lies across the street from the American embassy, a modest structure compared to the gleaming new edifice where H.E Yuan Guisen, Ambassador of The People’s Republic, presides. His country’s links with The Bahamas may cause him more headaches as allegations are surfacing in the local press about fraud, corruption and over billing at the highest levels of CEXIMB and CCA.
Meanwhile, Baha Mar towers over Cable Beach, stark and unoccupied, with no predicted date for opening. No guarantee of future profitability was ever given, but that prospect cannot even be tested while the hotels’ doors remain shut. 1
Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant. He has recently released his autobiography, A Corkscrew Life: Adventures of a Travelling Financier.
1 In March, Deloitte, the receiver acting for Chinese lender CEXIMB, formally listed the property for sale through Toronto-based international real estate firm Colliers International. It is estimated it will cost any buyer about $600 million to complete construction. Colliers is just beginning to show Baha Mar to potential buyers.