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Steve Green

Judge orders mediation for Fontainebleau, banks

22 June 2009

LAS VEGAS, Nevada -- With an unidentified party possibly willing to loan money to the idled Fontainebleau Las Vegas resort, a bankruptcy judge has ordered Fontainebleau and banks it is suing to enter mediation in hopes of resolving their disputes.

Judge Jay Cristol in Miami signed the order Thursday.

"The debtors represented at the hearing (earlier this week) that they have an additional unnamed lender standing by to provide funds necessary to complete the project, contingent upon the debtors receiving the draws of money which they claim to be due from the revolving group lenders," Cristol said in his order.

"The financial implications of the dispute are vast and can possibly result in losses to some party or parties of hundreds of millions or even over $1 billion," the order said. "It would be in everyone's best interest if this matter could be resolved in a prudent, businesslike manner rather than through litigation."

Cristol ordered the mediation to occur on or before July 10 and said it would be prudent for the unnamed third-party lender to participate.

While the third-party lender has not been identified, a report this week in the Las Vegas Business Press said Union Labor Life Insurance Co. (ULLICO) and Fontainebleau have recently been in talks about additional financing.

Based in Washington, D.C., and founded in 1927 by the labor movement, ULLICO is still associated with organized labor and has some $5.3 billion in assets under management.

Herb Kolben, chief real estate investment officer for ULLICO, on Friday said ULLICO had not been approached by Fontainebleau about additional funding. If ULLICO is approached, he said the insurance company would consider any deal on its merits.

He said ULLICO has about a 15 percent to 20 percent position as a first-lien lender in a loan for the resort's retail component, which is not in bankruptcy. He declined to specify the amount of the loan, but said it's not in default.

Bankruptcy court records indicate a $315 million loan for the retail component was funded by now-bankrupt Lehman Brothers Holdings Inc., along with ULLICO, Mitsui Trust Co. and National City Bank

While the Fontainebleau retail component is about 50 percent pre-leased, its continued development and opening is contingent on completion and opening of the resort hotel-casino, Kolben noted.

He said problems at Fontainebleau are associated with the economy and that the Miami-based Turnberry companies behind Fontainebleau are "a great organization."

"I fully expect them to come out of this," he said.

Mediation of the disputes between Fontainebleau and the banks likely will be a complex process potentially affecting hundreds of lenders.

Fontainebleau sued Bank of America and other revolving loan banks in April, charging they wrongly cut off funding and it now wants the bankruptcy court to order the banks to release $656 million it needs to get the project back on track.

The banks involved in the $800 million revolving loan agreement this week asserted Fontainebleau defaulted on its credit agreement because of cost overruns and alleged misrepresentations.

Dozens of term lenders in the case, in the meantime, have sued Bank of America and other revolver banks alleging the default reduced the value of the term lenders' collateral by effectively shutting down the project.

And while subcontractor liens and lawsuits are piling up against the project, credit rating agency Standard & Poor's has issued a report suggesting the project itself doesn't make economic sense under its current capital structure.

The economic climate, in the meantime, hasn't helped the project as it was unable to sell condominiums that would have covered substantial construction costs.

In the meantime, the recession has reduced visitation to Las Vegas and hurt hotel-casino operators -- a situation likely to get worse once CityCenter and other new projects open in the U.S. gambling capital later this year and in 2010.

The 63-story Fontainebleau is planned to have 3,815 hotel rooms, a convention center, retail and entertainment offerings; and a casino with 1,700 slot machines, 125 table games, a poker room and a race and sports book.