Wednesday, January 4, 2017

Building The Chinese Century Hits A Wall At Baha Mar

Building The Chinese Century Hits A Wall At Baha Mar





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If you’re worried about China taking over the world, Baha Mar may help you breathe a bit easier. The $3.5 billion casino resort in the Bahamas, the largest hospitality project ever in the Caribbean, was supposed to revivify tourism and the national economy and help China extend its economic and political influence in the Caribbean and Latin America through soft power with commercial characteristics. Instead, Baha Mar has missed two scheduled opening dates and is now embroiled in a bankruptcy battle spreading from the Bahamas to the US and China.
Baha Mar chairman and CEO Sarkis Izmirlian tried for over a decade to develop a resort on a 1,000 acre (405 hectare) parcel along Nassau’s renowned Cable Beach. Izmirlian, a longtime Bahamas resident, and his family that made its fortune in peanuts have reportedly committed nearly $1 billion to the project. The resort endured aborted beginnings, including a 2007 agreement with Harrah’s Entertainment, now part of Caesars Entertainment CZR +0.00%, to manage the property. In 2010, the project found new life when China Export-Import Bank agreed to a concessionary $2.45 billion loan, part of China’s outreach to the Americas, as well as a way to get a piece of and keep an eye on booming Chinese overseas travel.
The Baha Mar resort may look finished, but a burgeoning dispute between the developer, Chinese builder and Bahamian government playing out in local and US courts threatens to delay its opening further. (Photo credit: Baha Mar)
Baha Mar resort may look finished, but a burgeoning dispute between the developer, Chinese builder and Bahamian government playing out in local and US courts threatens to delay its opening further. (Photo credit: Baha Mar)
The master plan for Baha Mar includes four new hotels – under the resort’s own Baha Mar brand, SLS Lux, Grand Hyatt and Rosewood, owned by Macau gaming investor Cheng Yu-tung’s New World conglomerate – plus the currently operating Melia Nassau Beach, formerly a Sheraton, with more than 2,300 rooms plus residences, over 30 food and beverage choices, luxury shopping, art galleries and studios, and a full range of outdoor activities from gardens to a Jack Nicklaus designed golf course. When completed, Baha Mar will give a double digit boost to the Bahamian GDP and create 5,000 jobs in the tourism dependent economy where unemployment runs in the double digits.
Baha Mar could make the Bahamas a major gaming destination, especially for visitors from the US east coast. The former British colony is just 50 miles (80 kilometers) from Florida and just over two hours by air from New York. The island nation missed its window as a natural successor to Cuba as America’s offshore gaming playground. Then, with the rise of Atlantic City in the 1980s and subsequent expansions, the US east coast had more accessible gaming, and if people were going to get on a plane, why not go to Las Vegas? The Bahamas currently has Atlantis on Paradise Island, where the casino takes a backseat to the waterpark and other family attractions, and an expanding Genting casino hotel on Bimini that grew out of the Malaysian group’s Florida cruise business
Baha Mar promised a sophisticated integrated resort experience that would rival anything in the US. Management brought in Global Gaming Asset Management, the team of former Las Vegas Sands LVS +3.09% executives led by former LVS president and COO William Weidner, to run the gaming operation with 150 tables and 1,500 machines. Thanks to changes in gaming rules, the resort plans a full array of casino and sports book offerings, including live in-game play, featuring mobile technology that enables bets from anywhere in the resort. Add a beach that, unlike Atlantic City, has comfortable year-round temperatures, and Baha Mar looks like a winning package to recapture the east coast market.
The China connection gives Baha Mar chance attract customers from east Asia, too. Along with China's money and potential tourist market, Baha Mar got one of its biggest builders, state controlled China State Construction Engineering Corporation, as its general contractor through subsidiary China Construction America. Baha Mar has publicly complained about delays in the construction process and the quality of work that it says led to cancellation of scheduled openings in December and March, concerns it’s reportedly long voiced privately. The contractor counters that Baha Mar owes it $140 million and blames problems on the developer's inadequate financing and poor design. Baha Mar also claims China Ex-Im Bank has refused to disburse the remainder of its loan, more than $100 million. Negotiations, including a session in Beijing that included Bahamian Prime Minister Perry Christie early this year, have failed to reach agreement.
Late last month, Baha Mar filed for Chapter 11 bankruptcy in Delaware, claiming it hired 2,000 workers for the putative March opening and can’t pay them. “The Baha Mar Board of Directors has determined that due to the financial consequences of the repeated delays by the general contractor, and the resulting loss of revenue, the Chapter 11 process is the best path to provide the time to put in place a viable capital structure and working relationships to complete construction and successfully open Baha Mar,” the company says on its website. “We are committed to doing all we realistically can to move Baha Mar forward to be completed and opened successfully. We are confident that once opened, Baha Mar will be a world-class destination resort that will attract guests from around the world and serve as a key economic sparkplug in The Bahamas.”
China Construction America has filed suit in the US to stop bankruptcy proceedings there. This week, a judge in the Bahamas refused to recognize the US bankruptcy filing, agreeing with the Chinese company that such legal action belongs in that country. Unlike a US Chapter 11 reorganization, bankruptcy in the Bahamas would be via liquidation. Prime Minister Christie has called Baha Mar “a matter of utmost national importance” and, while urging the parties to find their own solution, suggests the resort can be completed relatively quickly through the Bahamian process. Baha Mar claims liquidation would amount to government seizure of its property.
Talks reportedly continue, and at some point, in some form, it’s likely Baha Mar will get finished and opened. But the story is a cautionary tale for the likes of Antigua, where another Chinese resort project has been proposed. Hitching your wagon to Beijing doesn't guarantee a smooth ride.