Print
E-mail
Share
digg
Newsvine
Facebook
Stumble
Technorati
reddit
Fark
twitterGAMING:
Sued by Fontainebleau, banks could cite ‘act of God’ as defense for refusing funds
Lenders could argue economic downturn fulfills interpretation of termination clause in loan agreement
Tiffany Brown
A lawsuit brought by officials of the Fontainebleau Las Vegas, pictured at right Tuesday, accuse lenders of breaking the terms of an $800 million loan agreement. Fontainebleau committed “one or more events of default,” Bank of America says.
Wednesday, April 29, 2009 | 2 a.m.
Fontainebleau Lawsuit
Another Strip project is in danger of shutting down. Find out what the future holds for Fontainebleau. Plus, two banks with a presence in Las Vegas report First Quarter earnings.
Related Document
Sun Archives
Sun Coverage
Beyond the Sun
Fontainebleau Las Vegas
Legal experts say the banks attempting to back out of their commitment to finance the Fontainebleau Las Vegas might defend their decision by arguing the economic downturn that has created doubts about the project’s future is an act of God.
Fontainebleau has sued the banks, accusing them of breaking the terms of the $800 million loan agreement.
If it lands in court, the case could come down to the interpretation of the financing contract’s “material adverse change,” or MAC clause, the experts say. The clause gives lenders the right to terminate a loan before a project is completed for “any event or circumstance which has a material adverse effect on the business, assets, properties, liabilities (actual or contingent), operations or condition (financial or otherwise) of the companies, taken as a whole,” according to the Fontainebleau loan agreement, obtained by the Sun.
Definitions of what constitutes such an event — sometimes referred to as an act of God — are vaguely worded and often lead to intractable disputes, experts say.
“Companies will fight over what this means,” said Andy Gabriel, a commercial real estate attorney with McDonald Carano Wilson, which is not involved in the lawsuit.
One analyst, who asked not to be identified and is not connected to the Fontainebleau or its loans, said such clauses aren’t meant to apply to economic downturns. Rather, they are intended to apply to fires, floods, terrorist attacks and other events that cannot be anticipated by financial models.
“It would be idiocy for the banks not to include the ups and downs in business cycles in their analysis,” the analyst said. “It’s their job to analyze business risk. If an economic downturn can affect your loan, it’s not much of a commitment, then, is it?”
In its lawsuit, Fontainebleau says it attempted in March to draw $670 million available under its revolving loan, along with another $350 million available under a term loan. Bank of America refused and Fontainebleau resubmitted its request, this time arguing that the revolving funds, according to the loan agreement, should be made available once the term loan was fully drawn. Bank of America refused again and Fontainebleau eventually requested only the amount available under the term loan.
Fontainebleau’s request for money from the revolving line of credit may have been interpreted by the banks as a sign of trouble ahead, especially if Fontainebleau were to use the money to fund construction costs not anticipated in the original budget, financial experts say.
With earnings at some major Las Vegas casinos cut in half, room rates at historic lows and more than 10,000 additional hotel rooms expected to cannibalize business from Strip properties, the banks involved in the Fontainebleau loan in question have cause to worry.
Fontainebleau lenders Bank of America, Barclays Bank, Deutsche Bank and Royal Bank of Scotland already have lent money to Las Vegas casino companies at risk in the recession. Fontainebleau was financed before the economic meltdown, when many Las Vegas casinos were generating record profits.
Analysts say Fontainebleau presents a bigger financial risk than resorts built by other Las Vegas gaming giants, such as MGM Mirage’s CityCenter and Boyd’s Echelon, because it doesn’t have as large a customer list to draw from.
Fontainebleau officials have declined to discuss specifics of the loan agreement between the banks and the developer, which is confidential. In an April 20 letter to Fontainebleau Las Vegas Chief Financial Officer Jim Freeman, Bank of America — which arranged the $800 million loan among the banks — said Fontainebleau committed “one or more events of default” but does not elaborate.
However, during a private conference call last week among banks involved in the Fontainebleau loan, a representative of Bank of America said Fontainebleau had breached at least four elements of the loan agreement, according to a source familiar with the discussions who asked not to be identified. The alleged breaches mentioned included the test of “material adverse change” and representations of what Fontainebleau would cost to finish.
Also cited during the call was an “insolvency test,” which measures the fair market value of a project’s expected earnings as compared with its debts. Among other gloomy predictions of the Fontainebleau’s future, bond rating agency Standard & Poor’s said in February that Fontainebleau earnings after opening are expected to fall short of interest payments on the property’s debt, in part based on lackluster demand for condos. Fontainebleau hoped to raise as much as $800 million from the sale of more than 1,000 condo-hotel units.
The bank representatives also discussed an “in balance test,” a monthly examination of whether a project has as much money going in the door as it does going out. During the conference call the banks noted that Fontainebleau was “in balance” on March 25, when the company drew money from a term loan.
This month Fontainebleau notified lenders that the remaining costs needed to complete the project “appeared to exceed the available loan funds” and that the company likely wouldn’t pass the “in balance” test as required by the lenders.
Failure to pass the test does not constitute a default of the loan agreement, the lawsuit contends. “At most, it only delays the ability to draw funds,” it continues.
Bank of America spokeswoman Shirley Norton said Tuesday that the bank “continues to have discussions with Fontainebleau Las Vegas regarding a structured financing for the project.” She declined to comment further on the lawsuit.
Fontainebleau spokesman David Satterfield on Tuesday described the discussions as “constructive.”
“We expect (the banks) to abide by their contractual commitment and fund the $800 million we need to get this project completed,” he said.
Banks can’t simply walk out on their obligations unless the borrower breaks its end of the deal.
An argument that the banks could not have foreseen a recession wouldn’t stand up in court, the analysts said. It would also make the banks look incompetent, according to the analysts.
Another local attorney familiar with such loan agreements, who is not involved in the case, says invoking a MAC clause can tarnish a bank’s reputation. That’s why banks rarely invoke the clause — not even after the Sept. 11, 2001, terrorist attacks, when fears that banks would renege on loans were widespread, the attorney said.
“There’s so little case law out there as to what constitutes a MAC that you’re walking into pretty unknown territory,” the Las Vegas attorney said.
“I haven’t yet seen banks using this as a reason ... but this would be the type of lending environment where you might see this happen,” Gabriel added.
Discussion: 11 comments so far…
Post a comment
- Most Read
- Discussed
- Most E-mailed
- Police: 3 arrested in officer’s death have gang ties
- Corrections officer with Metro killed in U.S. 95 crash
- System fails to catch contractor’s family tie with county
- Where to watch UFC 106
- Fontainebleau contractors say sales process is flawed
- UNLV and Southern Illinois will be guarded tonight
- Station Casinos, lenders agree to rent decrease at 4 properties
- SEC sues former gaming exec for alleged insider trading
- Findlay guard Joseph scores 33, talks about UNLV
- Bishop Gorman takes Sunset Region title in win over Cimarron
Blogs
The Kats Report
For props, Lewis Black needs only his manic delivery and torrid material (3 Comments)
Elsewhere
Sands China raises $2.5 billion in Hong Kong IPO (1 Comment)
Marquardt v. Sonnen scheduled for UFC 109
Bloggity, Bloggity, Bloggity
Will a fourth consecutive title by Jimmie Johnson be good or bad for NASCAR? (3 Comments)
Top Chef: Las Vegas
The Jet Stream: And then there were four
Top Chef Episode 12: On keeping it simple
Miech Again
Chilly start for Chace, but Stanback says he'll warm up (2 Comments)
- Live chat
- Tuesday, noon PST
- Chat with Krista Creelman
- Problem Gambling Center executive director Krista Creelman will answer questions about gambling addiction from Las Vegas Sun readers from noon to 1 p.m. Tuesday, Nov. ... Submit question
Calendar »
- 22 Sun
- 23 Mon
- 24 Tue
- 25 Wed
- 26 Thu
-
The Four Tops at The Orleans Showroom
Orleans Hotel-Casino
-
Football specials at Diablo's
Diablos Cantina
-
Simon Says Brunch at Simon
Palms Place Hotel & Spa
The Sun
Locally owned and independent for more than 50 years.
Let's just call Fontainebleau "City Center Lite".
Material Adverse Change "MAC" Is also known as Force Majeure or "Act of God" it includes, War, Strike, Riot, Crime or Natural Disaster. It is not intended to excuse negligence or malfeasance.
If they get to use this defense, so do all of us. Can't quite pay the bills this month? No sweat - it's an act of god!! This might not be a precedent the courts want to promote.
Go get them Jeffrey and Steve. Turnberry will win.
Walls Street and Bankers have sucked us dry, it is about time the little guy wins.
http://www.turnberry.com/about2c.html
Link above to plaintiff.
Why not? God thinks he's a banker.
Don't they mean an act of the Flying Spaghetti Monster?
If Bank of America first said Fontainebleau committed "one or more events of default," and now they say that this is not the case but they simply can't lend because of an "act of God" this sounds to me that their first statement was libelous. Even if they are let out of the loan agreement, they should have to pay damages for their libelous statement which they seem to have created as an initial fictional strategy to get out of their loan agreement prior to them settling on the "act of God" strategy.
I worked in construction contracts for Bechtel, and let me tell you this claim of Force Majeure is absurd. If you signed a contract to provide funding to a project, you can't pull out just because the owner is stupid. Or because times change. The only way I can see the lenders getting any leverage is if the project is inundated with change requests and change orders. But this is probably the fault of the project's Architects and Engineers. So you sue them accordingly. But sorry, BOA and others, you are screwed. Guess you'll have to use some of your government bailout money to finish the F. Because you are so fu.k.d.
It's not fair. Fire, flood, hurricane tidal waves I can understand. But a Bush/Cheney depression? Why blame ME? They were working for that other guy, don't you know?
CactusJack
you have it backwards..bankers think they're God
Ken Lewis being pushed aside by Bank of America is an act of God. BOA is one greedy bank that got too big for its britches. The little man, who BOA constantly squeezes with one absurd fee after another, has had to bail out BOA while its execs continue to receive bonuses for a "job well done." Share the bailout funds, pigs.