Despite the appearance of suddenness, Baha Mar began preparing for chapter 11 bankruptcy in May 2015, driven by a severe liquidity crunch brought on by more than 2,000 new hires – which boosted its monthly payroll by about $4 million – and ongoing wrangling with China Construction America (CCA) over millions of dollars outstanding between the partners.
Meanwhile, CCA, which has yet to comment – although Guardian Business understands a corporate statement is due in the next day or so – alleges that it is owed $140 million in unpaid construction and other claims. CCA is the top creditor listed in Baha Mar’s filing, being owed a little over $72 million. According to the filing, Baha Mar owes between 1,000 and 5,000 creditors.
“The debtors, in reliance upon the opinion of their chartered quantity surveyors, vigorously dispute most, if not all, of these allegations, and many of the disputed claims are subject to pending or future litigation between the debtors and CCA, its subcontractors, and/or CSCEC (based on the completion guarantee).
“Moreover, the debtors believe that, with respect to certain alleged claims asserted by CCA, any potential liability on the part of the debtors may be subject to future recovery or offset for CCA’s construction delays and other performance failures. In any event, the debtors believe the amount, if any, for which they could be held liable to CCA will prove to be substantially less than the amount alleged above, even before set-off of the substantial amounts owed by CCA to the debtors.”
Baha Mar reported that since the beginning of April 2015, without the ability to generate revenue from the completed project, the debtors have been operating in a severe liquidity crunch, compounded by CCA’s alleged refusal to repay the debtors the portion of the $54 million it received pursuant to the November 19, 2014 Meeting Minutes, which it had agreed to pay back if it missed its completion milestones.
Moreover, China Export-Import Bank has refused to advance the remaining amount of approximately $112 million available under the Prepetition Credit Facility absent certain unattainable conditions, including additional equity contributions.
That and other developments made it clear to Baha Mar by the end of May 2015 that without a negotiated resolution, they would run out of cash by the end of June 2015, if not sooner.
The lawsuit filed in London yesterday – in which Baha Mar seeks damages in excess of $200 million – exemplifies the contentious character of the relationship.
Baha Mar President Thomas Dunlap swore before U.S. Bankruptcy Court in Delaware that without the $80 million Debtor-in-Possession (DIP) financing facility arranged by developer Sarkis Izmirlian – $30 million of which will be used in the next 30 days – and access to the $9.3 million cash collateral left on hand, operations at the resort would come to “an immediate halt.”
The spectacular collapse of the facade that has been so painstakingly stitched together in the political debate – with Prime Minister Perry Christie engaged in ostentatious shuttle diplomacy between Nassau and Beijing and with Cabinet ministers dropping non-too-subtle reminders that Christie was “personally involved” in working toward a solution – is underlined by Dunlap’s assertion that without access to the DIP Facility and the use of cash collateral, the immediate cessation of Baha Mar’s operations would result in irreparable harm to the businesses and to the ability to timely open their businesses.
In his filing in support of the Baha Mar bankruptcy application, Dunlap noted that he represented the debtors, including Northshore Mainland Services, which – for the purposes of the bankruptcy filing – has been designated the foreign affiliate of Baha Mar Enterprises Ltd., Baha Mar Entertainment Ltd., Baha Mar Land Holdings Ltd., Baha Mar Leasing Company Ltd., Baha Mar Ltd., Baha Mar Operating Company Ltd., Baha Mar Properties Ltd., Baha Mar Sales Company Ltd., Baha Mar Support Services Ltd., BML Properties Ltd., BMP Golf Ltd., BMP Three Ltd., Cable Beach Resorts Ltd. and Riviera Golf Ventures Ltd.
As for why, Dunlap said the debtors chose to file for bankruptcy protection because they still believe that a negotiated solution is possible among the existing parties to the project that would lead to its completion and successful opening. However, because of their strained liquidity, the debtors could not continue to operate in the ordinary course. He said they believe that chapter 11 is the best available means for preserving and maintaining the project and then achieving their ultimate goal of becoming an operational word-class resort.
“To position themselves to achieve that goal, in addition to continuing operations of the Melia without interruption, the debtors will continue to operate and fund payroll for the project until further court hearings, which are anticipated to take place in three weeks’ time,” Dunlap said.
“During such time, the debtors will explore avenues to finish construction, secure any necessary additional financing through a chapter 11 recapitalization, and monetize certain assets, the most significant of which are their construction claims against CCA, its subcontractors, and/or CSCEC under the Completion Guarantee.
He said the proposed course of action represented the best strategy to maximize value for all of the various stakeholders. It would, he said, allow the debtors to establish certain administrative procedures to promote a seamless transition into the Chapter 11 cases, continue the debtors’ ongoing operations and preserve the project’s viability, obtain debtor-in-possession financing and use cash collateral in the operation of the debtors’ businesses, and protect the debtors’ assets and interests from any improper actions that may be taken by third parties.
Dunlap asserted that the Baha Mar project is approximately 97 percent complete and, when fully completed, will be one of the largest employers in The Bahamas. He went on to detail the assurances given by CCA of various deadlines which the company failed to meet, and the alleged consequences of each missed deadline.
In fact, Dunlap said the second missed construction completion date proved “disastrous” as CCA effectively provided no advance notice that the March 27, 2015 deadline would not be met.
“This resulted in the debtors having ramped up to employ over 2,000 employees hired in anticipation of the project’s opening, at an increased cost of approximately $4 million per month, in addition to other significant sunk costs such as operating supplies, advertising, and promotional activities. Due to the considerable construction delays, additional expenses incurred mitigating CCA’s breaches and failures to perform, extended operations costs, the significant costs of hiring and retaining the new employees in the hope of opening the project, the lack of meaningful revenue generation, and the absence of a definitive construction completion date, the debtors exhausted their liquidity and were forced to commence the Chapter 11 cases,” he said.
In fact, notwithstanding the status of the project, the debtors currently employ – excluding Melia – over 2,400 employees and staff at an average monthly payroll of $7.5 million as of the petition date. Approximately $4 million of that average monthly payroll is attributable to the 2,070 employees hired in early 2015 in anticipation of the project being completed and opened to the public on March 27, 2015.
“Over 1,700 of these recent hires are rank and file employees that the debtors spent significant time and resources training to be prepared to operate the project by the end of March 2015. Since that time, the debtors’ management has worked diligently to keep as many of these employees busy on various projects around the project property as well as on off-site public works projects around New Providence Island.
“Notwithstanding the commencement of the Chapter 11 cases, it is the debtors’ intention to continue to operate, fund payroll for the project, and evaluate all alternatives, until further court hearings which are anticipated to take place in three weeks’ time,” Dunlap said.
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