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Steve Green

Fontainebleau fires back, outlines bank dispute

8 July 2009

LAS VEGAS, Nevada -- Attorneys for the Fontainebleau Las Vegas resort leveled new allegations Wednesday against banks that terminated funding for the $2.9 billion hotel-casino, which now sits unfinished and in limbo while a bankruptcy court decides its fate.

In filings in Miami bankruptcy court, Fontainebleau also revealed new details about the events that led up to its confrontation with Bank of America and other big bank lenders -- a confrontation followed by Fontainebleau's bankruptcy filing and the halting of construction on the resort.

Besides trying to reorganize its finances in bankruptcy court, Fontainebleau is suing the banks.

In a motion for summary judgment, it wants the bankruptcy court to order them to immediately release $656 million in funding it says is needed to get the project back on track. That case has been referred to mediation, which is set for Thursday and Friday in New York.

In court papers, Bank of America and the other big banks said they rejected a March 2 request by Fontainebleau at that time because it violated a technical provision in the credit agreement governing the order in which funds would be provided and under what conditions. Later, the banks have said, they determined Fontainebleau was in default of the credit agreement and insolvent because of cost overruns and other problems.

Fontainebleau fired back Wednesday, insisting it wasn't in default but saying even if it was, that did not excuse the banks from living up to their end of the credit agreement. Fontainebleau also again insisted it didn't violate the terms in the credit agreement concerning the conditions for advances and the order in which funds would be provided.

The timing and conditions dispute revolves around whether Fontainebleau had fully drawn on a term loan before requesting funds from an $800 million revolving loan facility with the banks.

Fontainebleau insists it fully drew on the term loan by requesting the remaining term-loan money; but the banks say "fully drawn" means funded, not just requested.

Fontainebleau also leveled a new allegation. The banks, it said, refused to advance the money under the revolving loan agreement because they knew if they did, the separate set of term lenders would then have a security interest in those funds.

The term lenders have sued Bank of America and the other revolving lenders over the funding dispute, saying B of A and the other banks wronged them by inducing them to loan funds to a failing project while withholding their own money.

"If the banks had funded into the bank proceeds account on March 3, their funds would have served to collateralize the term lenders as well, as the disbursement agreement requires," Fontainebleau said. "Thus, instead of having a 100 percent interest in their $800 million commitment, the revolver banks would have been diluted by the term lenders' interests.

"By resorting to self-help and improperly refusing to honor the March 2 (request), the revolver banks have harmed not only Fontainebleau, but the term lenders as well. It is thus unsurprising that the term lenders are pursuing the (lawsuit) against the revolver banks," Fontainebleau said.

Fontainebleau also revealed Wednesday why it sought the $656 million in revolver funding immediately after requesting $350 million from the term lenders. Bank of America has said that Fontainebleau never justified why it needed a sudden infusion of more than $1 billion in cash this spring.

"Fontainebleau faced a deteriorating local economy in Las Vegas, and a financial crisis in which their banks were failing ... or being acquired on the brink of failure," Fontainebleau said.

"With close to $2 billion in equity, retail financing, second-lien financing and term-loan financing already committed, Fontainebleau was concerned that its last set of lenders -- the revolver banks -- would attempt to evade their commitments and pull the plug or simply go out of business," Fontainebleau said. "Fontainebleau was prepared to incur the extra interest expense by drawing the maximum possible revolver loan in order to protect itself against the risk that the banks would breach. In retrospect, not only is Fontainebleau's reasoning obvious -- it was prescient."

The banks, for their part, have said they're no longer funding Fontainebleau for several reasons -- not just the dispute over the timing and conditions of the loan advances.

"Even if Fontainebleau's tortured reading of the credit agreement were correct (which it is not), the motion (for summary judgment) should still be denied because there are compelling reasons to believe that, long before it issued the March notice of borrowing that is the subject of this motion, Fontainebleau had materially and repeatedly breached the credit agreement that it now asks this court to `enforce' against the lenders," the banks said in a filing last week.

Besides B of A, the banks being sued are B of A subsidiary Merrill Lynch Capital Corp., JPMorgan Chase Bank, Barclays Bank PLC, Deutsche Bank Trust Company Americas, the Royal Bank of Scotland plc, Sumitomo Mitsui Banking Corp., Bank of Scotland plc, HSH Nordbank AG, New York Branch; and MB Financial Bank, N.A.

Separately, Fontainebleau asked the bankruptcy court for permission to get out of a lease for office space near its resort construction site. Having laid off much of its staff, Fontainebleau said it no longer needs the space costing it $31,000 per month in the Plaza Building at 101 Convention Center Drive.

Fontainebleau said its landlord last month served it with a notice of default on the lease, asserting it owed approximately $30,000 in past-due rental payments.

To protect its position, the landlord later drew upon a letter of credit for $117,000 submitted along with a deposit of $30,000 for the lease.

That letter of credit was issued by a familiar player in the case: Bank of America.