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Steve Green
 

Lenders: Cost overruns led to Fontainebleau loan default

17 June 2009

LAS VEGAS, Nevada -- Bank lenders for the first time have publicly disclosed why they declared the $2.9 billion Fontainebleau resort in Las Vegas in default on its construction loan and shut off funding. Tuesday, they cited hundreds of millions of dollars in cost overruns and possible misrepresentations by the hotel-casino developer.

"Fontainebleau repeatedly made contractually-required representations that it was, among other things, solvent, and that its remaining construction costs did not exceed its available remaining financing. But ... Fontainebleau management has submitted documents and made statements to the lenders that call those representations into question," attorneys for Bank of America and other bank lenders said in a Miami bankruptcy court filing.

"Moreover, developments in recent weeks indicate that Fontainebleau had been in serious financial distress over the past year," the bank lenders said in a filing opposing Fontainebleau's request that its lawsuit filed against the banks in April be expedited in bankruptcy court.

A hearing on Fontainebleau's request is set for Wednesday as Fontainebleau seeks an order requiring B of A and the other banks in a revolving loan agreement to release $656 million it says it needs to get the stalled project, 70 percent completed, back on track. Fontainebleau charged in the April lawsuit that the banks had wrongly stopped financing the resort over an unspecified event of default.

Bank of America said in court papers Tuesday that the case doesn't belong in bankruptcy court since it involves alleged breaches of the lending contract that occurred before Fontainebleau filed for bankruptcy last week.

B of A also charged that prior to the bankruptcy, Fontainebleau had been in no rush to fast-track its lawsuit against the banks, so there's no rush now to proceed with the suit; and that the lenders need time to study the resort's financial situation and events that led to the alleged default.

Fontainebleau attorneys responded to Bank of America's filing late Tuesday, insisting the lawsuit belongs in bankruptcy court as being a core part of the bankruptcy process and saying the banks -- not Fontainebleau -- are responsible for the delays in the April lawsuit.

"Any 'delay' here is entirely the fault of the banks, which invited Fontainebleau to commence settlement discussions, and then continued those discussions, for weeks on end without any resolution -- or even a meaningful counter-proposal. Fontainebleau understandably chose to negotiate first rather than burn its bridges, and the banks' dragging their feet in negotiations in no way constitutes delay on Fontainebleau's part," a Fontainebleau court filing said.

Fontainebleau also denied it defaulted on the loan, but said even an alleged default did not give the banks the right to stop funding the resort.

"Thus, simply put, even if an event of default had occurred -- and none did -- the banks would not have been permitted to refuse to honor the March 2 notice (from Fontainebleau seeking funds)," the Fontainebleau attorneys said.

Fontainebleau also issued a statement about the banks' court filing.

"Bank of America and the other revolver banks claim there is no urgency to deciding this issue. Tell that to the thousands of unemployed workers who are anxiously awaiting for funding to resume so they can go back to work. Delaying construction for lack of funds creates significant costs and serious human hardship, so it is absolutely essential that this issue be resolved as soon as possible," the company said.

In Tuesday's court filing detailing the alleged breach of the resort construction credit agreement, the banks said Fontainebleau was provided $138 million in funding on March 25 after Fontainebleau submitted papers showing the project was "balanced" -- that is available funds exceeded construction costs by about $14 million.

But on April 13, B of A said, the lenders were informed by Fontainebleau that the project had become out of balance. The bank said Fontainebleau listed additional costs of $187 million that needed to be funded but were not included in the March paperwork.

"But Fontainebleau offered no explanation of what had occurred in the prior three weeks to alter the 'in balance test' calculation so dramatically. In fact, it has never done so," charged B of A, which suggested Fontainebleau was in default on the agreement in early March.

"On April 17, Fontainebleau representatives met with the lenders. During this meeting, Fontainebleau confirmed that it was facing a substantial construction deficit and would not be able to complete the project using the funds available under the credit agreement -- Fontainebleau needed additional new financing. Fontainebleau also told the lenders that it would likely seek bankruptcy protection to restructure its financial obligations," B of A said.

"Additional facts continued to surface suggesting that Fontainebleau was in default under the Credit Agreement on March 2, 2009. For example, Fontainebleau's Chapter 11 proceeding papers disclose, for the first time, that it has been 'intensely focused' on securing additional funding sources for the project since at least Sept. 15, 2008, when Lehman Brothers Holding Inc., which was the largest participant in the project's mortgage loan, filed for bankruptcy protection. Fontainebleau has still not obtained firm commitments for this additional funding," B of A said.

The bank also recounted how Fontainebleau has been sued by CCCS International, a construction management firm that says it was hired to find overpayments on the project. The CCCS suit said that when it was hired in 2008, Fontainebleau had projected it had made $130 million in prior overpayments.

Tuesday's filing also noted a report by Moody's Investors Service which, like fellow credit rater Standard & Poor's, had predicted early this year that Fontainebleau could be headed toward default on its credit agreement because of a lack of condominium sales at the resort and other problems.

And the bank noted a June 8 story by Liz Benston in the Las Vegas Sun quoting consultants as saying the project was as much as $375 million over its most recently revised budget; and quoting financial analysts as saying the cost of the project had probably jumped to $3.5 billion.