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Gaming Guru

Steve Green

In reversal, Fontainebleau lenders suggest liquidation

28 September 2009

LAS VEGAS, Nevada -- A key group of lenders to the stalled Fontainebleau resort in Las Vegas has lost confidence that the $2.9 billion project can be revived through the Chapter 11 bankruptcy process, and moved Friday that the project be converted to a Chapter 7 liquidation.

The Term Lender Steering Group filed a motion in Miami's U.S. Bankruptcy Court that the Chapter 11 case be converted to a sales process that would be supervised by a trustee.

Friday's filing represents an about-face for the term lenders, which had previously supported Fontainebleau's reorganization effort.

"Although more than $16 million of the Term Lenders' cash collateral has already been depleted, no meaningful progress has been achieved by the debtors and there is no reasonable likelihood of their rehabilitation," the lenders said in their motion.

"With completion of the project by the debtors not possible, a sale of the project to a third party and liquidation of the remaining assets is the only viable course to realize any meaningful value for creditors," the lenders said.

While Fontainebleau has disclosed it has been in talks with potential investors -- which the Sun reported last month included Penn National Gaming -- observers have been skeptical of a deal anytime soon given the enormous costs to complete the project, the demands of creditors seeking to be paid and the depressed state of the Las Vegas gaming market.

The term lenders -- participants in more than $1 billion in term loans to the project -- noted Fontainebleau had pinned its hopes on a lawsuit seeking to force another group of revolving-loan lenders to provide $656 million in funding for the project. That lawsuit has not been successful for Fontainebleau.

It was the revolving lenders' decision this spring to halt funding for the project that caused construction to stop, with 70 percent of the resort completed, sending it into bankruptcy. The revolving lenders cited cost overruns and other problems with the project and said Fontainebleau had defaulted on a key credit agreement.

Fontainebleau has not yet responded to Friday's motion that the case be converted to a Chapter 7 liquidation and it has stopped commenting to the media on its bankruptcy case.

In their motion Friday, the lenders also said progress has been hindered in the case because of "pervasive conflicts of interest that exist among the debtors on the one hand, and their principals, officers, managers, affiliates and related parties on the other hand."

Miami developer Jeff Soffer and Fontainebleau Chief Restructuring Officer Howard Karawan, for instance, serve in a variety of other capacities for Fontainebleau affiliates including some not in bankruptcy, the lenders said. At the same time, Soffer and other entities related to the debtors are liable to third parties, including the term lenders, under various guaranty and indemnity agreements.

The term lenders said that unless the case is converted to a Chapter 7 and a trustee is appointed to supervise the company and the sales process, "conflicts faced by the debtors will poison any sale process."

The lenders said Soffer has recently discussed with certain term lenders a transaction in lieu of a sale.

"Given that the debtors' shareholders lack any economic stake in the debtors, efforts by Mr. Soffer to formulate a transaction under which he will receive some consideration or benefit will, unless he is forced to negotiate at arms-length with an independent trustee, divert value that belongs to the estate from creditors," the lenders said.

They cited numerous alleged conflicts including Soffer's control of non-bankrupt Turnberry West Construction, which has filed a $675 million claim against the project including $63.9 million for its own fee. Turnberry West also asserts its construction lien is superior to that of lenders' liens.

"The Soffer family will benefit if Turnberry West prevails in those claims against the debtors and the term lenders," the lenders complained.

When Fontainebleau filed for bankruptcy protection in June, it said the Term Lender Steering Group had consented to the use of the group members' cash collateral to finance Fontainebleau's post-bankruptcy operations.

At that time, Fontainebleau said the steering group members held more than $350 million of the outstanding term loans, or about 34 percent of the total. More recent filings indicate those lenders hold about 27 percent of the term-loan debt.

Members of the steering group are investment fund managers Brigade Capital Management LLC of New York, Canyon Capital Advisors LLC of Los Angeles, the Carlyle Group of New York, Guggenheim Investment Management LLC of New York and Highland Capital Management LP/Nexbank Tower of Dallas.