February 25, 2016
Since 2008 the world has seen a good number of corporate catastrophes. So many, in fact, that a new subgenre of journalism called financial disaster tourism was invented by financial journalist and nonfiction author Michael “The Big Short“ Lewis. We”re talking here about corporate disasters with massive consequences, about commercial failures on the scale of ENRON, AIG, or Lehman Brothers. However, the story of Baha Mar, a gigantic new luxury resort in the Bahamas, brings new meaning to the phrase “financial disaster tourism.”
If you were to drive down the new highway built partly to connect it faster with the airport, you”d find the $3.5 billion mega-resort on Nassau’s Cable Beach closed. Fenced in and deserted, this marvel of construction resembles a cutting-edge theme park recently built and never to open. A ghost city covering 3.3 million square feet of prime real estate, it contains 20 swimming pools, 40 restaurants and bars, a championship golf course, four luxury hotels, a 200,000-square-foot convention center…and the largest casino in the Caribbean region. Despite the proximity of the Atlantis casino and hotel complex whose massive towers dominate Paradise Island a few miles across the azure-colored sea from Baha Mar. Abandoned it has remained for over a year since the original launch date, at a daily cost of $1 million and counting, as estimated last summer. That’s $365 million a year and counting.
It took 4,000 laborers, working 24/7 on shift, for four years in total, to create the skyline of Baha Mar: a record time for a construction of this size. So what happened?
The construction workers didn”t actually finish the project, that’s what happened. They dropped their tools upon reaching 97% completion. And the unfinished 3% the contractor left behind contained crucial items, meaning the resort”including several thousand (reserved) hotel rooms, with partners like Hyatt, Rosewood, and SLS”could not open for Christmas business.
This was when the real trouble began. A second opening in late March 2015 was also missed. The exclusively Chinese construction workers were flown en masse back to their homeland. Spring turned to summer and hot temperatures boiled into tropical storms or occasional hurricanes…and the owner of Baha Mar found himself fighting the battle of his life.
Founder Sarkis Izmirlian is a smoothly presented, unloquacious businessman born in Switzerland to a brilliant billionaire father named Dikran, an entrepreneur whom Bloomberg describes as an “Armenian peanut tycoon.” Both father and son”and family”live in Nassau’s Lyford Cay, of whose elite club Sarkis is a member. These high-net-worth credentials, as the Jan. 4 Bloomberg piece infers, may have helped turn Sarkis”aged 32 when the project began”into the perfect fall guy for a corporate catastrophe whose real cause we may never know. Sarkis” profile as a “rich white” man, as a local politician publicly referred to him, will have curtailed excess sympathy for a man who stood to lose nearly a billion dollars of his own money if things went wrong. Which they did, resulting in the bankruptcy of his company. A bankruptcy so large it has jeopardized the Bahamas” national credit rating, currently in danger of another downgrade to “junk” status, according to Standard & Poors” warnings reported by The New York Times.
How did it go so spectacularly wrong?
After the financial crisis of 2008, Baha Mar’s main investor, Harrah’s, pulled out of the project, leaving development plans to languish and Izmirlian keenly waiting for other backers with deep pockets to materialize. Which they did, in 2009, in the form of the state-owned China Export-Import Bank (Ex-Im). In a “deal with the devil,” as some islanders call it, Ex-Im offered Izmirlian a huge loan amounting to $2.4 billion. Izmirlian accepted the offer as one would a lifeline, and he himself provided an additional $850M investment to cover the rest of the budget. A major debt burden”but then, Baha Mar seemed overambitious from the start. Critics say it should have been built in phases or not at all.
Ex-Im brought in another state-owned company, CSCEC Ltd., a Shanghai-listed construction firm ranked 52nd on Fortune‘s Global 500, with a market cap of $48 billion. Its American subsidiary, China Construction America”or CCA Ltd. and CCA Bahamas Ltd.”provided 4,000 Chinese workers to build the mega-resort at high speed, a feat that workers of no other nation could match in terms of hard work and, presumably, low wages? CCA also invested $150M in the project for its own stake alongside Ex-Im Bank.
Observers familiar with the development’s early stages contend that the Chinese may have wanted to own the real estate beneath Baha Mar from the very start. These sources wish to remain anonymous since individuals who have “spoken up” received threatening telephone calls. Nonetheless, they broadly and controversially suggest that Ex-Im Bank lent $2.4 billion on a $3.5 billion project so that, in the event of default, the Chinese bank would become a 66% shareholder, in dollar terms. The sources allege that by pulling out on the developer just short of the project’s culmination, at a point when the developer still earned, and could expect, no income (due to incomplete construction), a liquidation of the project would certainly ensue. The receivership process would all but guarantee that purchasing the remaining 33% could be achieved with relative ease by the bank, and at a much reduced rate.
CCA Ltd. has aggressively denied such allegations of a “conspiracy,” stating in a press release dated July 7, 2015, that “Baha Mar’s decision to file for bankruptcy is the direct result of its failure to secure adequate funding and its mismanagement of the design of the resort project. This mismanagement includes replacing the principal architect after construction had commenced, late and incomplete delivery of design packages, and over 1,300 Construction Change Directives.” Izmirlian is to blame to the extent that he was in over his head. This and the fact that, unlike Sol Kerzner”who inspected the construction site of his Atlantis project up to three times daily”Sarkis delegated such responsibilities to a team he paid extremely well. Maybe he shouldn”t have remained so remote.
However, sources close to Baha Mar insist construction was running well behind for some time, citing memos written by the CEO “pleading with Shanghai to send more workers as they could not complete in time.” Construction quality was substandard, they claim, and evidence of poor craftsmanship has already been published in the form of CCA email correspondence betraying the use of “fake” materials. Sources privy to construction details allege it became easier for CCA to pull out workers than to remain liable for penalties or claims from the developer due to late completion or substandard workmanship”thereby saving face for China’s largest construction company. Of course, if it were true that Ex-Im’s long-term strategy was always to secure ownership of the real estate via liquidation, then withdrawal of the workers made for an essential tactic.
Either way, the Chinese contractor knew two months ahead of time that the resort was doomed to miss its delayed March opening, Nassau’s Tribune newspaper said this week. “In a confidential memo sent to its Beijing parent company on January 20, 2015, China Construction America (CCA) warned that the Cable Beach project and its stakeholders faced “irreversible and catastrophic loss” unless drastic action was taken.” Their request for 450 more workers was ignored.