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Sunday, July 5, 2015

BahaMar, a flagging economy and more bad news!

The BahaMar Mega Resort project in The Bahamas has hit a snag. Its developer, Mr. Sarkis Izmirilian, filed for Chapter 11 bankruptcy in the US state of Delaware on the 29th of June, 2015. This is what one would call the sum of all fears!


According to the declaration sent to the US Courts in Delaware made by BahaMar's CEO Tom Dunlap on behalf of its Board of Directors, state that essentially BahaMar hit a cash-flow crisis resulting from delays in opening this mega resort due to a prolonged construction phase and additionally claims of less than stellar work done by the general contractor, China State Construction and Engineering, with the project also being financed by The Export Import Bank of China.


In a nutshell: Recurring costs through incomplete construction in addition to weak revenue due to the fact that the project has not yet fully opened is really what it is.


BahaMar was scheduled to open on two separate occasions including the one now scheduled for October of 2015: Once back in May, 2015 that was put back because of construction being incomplete and back in November, 2014 for reasons unknown at the time but that we can now say was due to the construction being incomplete.


The recent Chapter 11 filing puts the new opening date of October of this year in jeopardy as well. One glaring issue is that it is already July, and the bankruptcy filing was done no more than one week ago. The bankruptcy hearing can last for up to 120 days, which may not indicate that financing cannot be secured through the Court of Delaware to complete the project within that time, but even for that financing to snake down the pipeline; engage new contractors who may or may not work out in the short term; and continue on with BahaMar's other management issues as a result of this bankruptcy filing, leaves one to question how doable the October 2015 date is as well.


We can only hope that this new date is doable and that the project hits all green lights coming down the lane in heavy, rush hour traffic. That and, even if only a short term measure, at least 50% of the Resort can be open and that the major works are fully completed with only finish-work remaining; i.e., cosmetic and aesthetically pleasing work. 


To bolster the claim made in the bankruptcy filing in The Court of Delaware against the China State Construction Company is a simultaneous writ filed by the BahaMar Group in the high court of the United Kingdom, seeking payment due to alleged damages done by the same construction company for $192 million dollars that BahaMar officials claim was as a result of shoddy workmanship and cost overruns resulting in further delays and damages.


To say that this is one huge cluster of confusion is an understatement. A huge cluster of confusion made more confusing due to the fact that the courts in Delaware granted BahaMar Group access to $30 million in financing to help with payroll due to the filing, as well as deal with a few other minor matters, The Supreme Court of The Bahamas has seen fit not to move on that ruling from the court in Delaware (at least not up to the penning of this submission) and has instead gone on record as being "minded" not to grant this to BahaMar. Under what premise exactly, we are not sure. However, as indicated by the Attorney General, it raises sovereignty issues: In that how can a court ruling in a foreign jurisdiction have any sway over the judicial system here?


Whatever the case is, I am minded to remind everyone that The Bahamas is an offshore financial centre. We deal with International Business Companies, their operations and wind-up's all the time. IBC's that conduct business in other countries but whose subsequent incorporation and supposed managerial structure is here in The Bahamas. This is not new to us, or should not be new to us.


Sovereignty concerns aside, the more important issue for us as a supposed financial and offshore jurisdiction leaves one to question why would a Bahamian company, albeit owned by a foreigner with status here in The Bahamas, feel the need to file in the court of Delaware and also have his businesses incorporated in there to boot?

A second important issue is that what should now be said, sovereignty sentiments aside, is how do we incorporate what is done in Delaware here in The Bahamas? Particularly in light of the fact that The Bahamas was promoted by the powers that be as having the potential to be an Arbitration Centre for such matters such as this Chapter 11 bankruptcy filing made by BahaMar and the subsequent writ in the British High Court to the tune of $192 million. While this is something we can and should explore, but due to length and concentration I won't at this time.

However, this speaks to a second part of my humble submission: The lack and weakness of other components within the Bahamian economy.


It's no secret the Bahamian economy is faltering. One moiety being due to us putting so much time, money and human resources trying to shepherd one mega project, BahaMar, to a successful completion and launch. The other part is due to what we have always been doing: Not taking concerted efforts and focus on diversifying established economies and trying to find out the potential of other sectors of the economy in creative and spirited ways.


Just recently, Standards and Poor's sent out an advisory about the possibility of a further downgrade of the Bahamian economy. Reasons they cite are, of course, the chaotic mess BahaMar finds itself in, and how that affects every other part of the economy due to factors we have already mentioned: Over focus on said project and lack of focus on other areas.


Just to give a little more information on how and why the S&P advisory should be taken very seriously: The Central Bank of The Bahamas, in addition to The International Monetary Fund in concert with The Ministry of Finance, have all pegged GDP growth in The Bahamas at a modest 1%. A negligible figure, for all intents and purposes. However, this 1% projected growth had factored in BahaMar being opened and operating fully.


Clearly BahaMar is not open and to make up any grounds within the next two quarters of this fiscal year- which started on July 1st, for all intents and purposes- with a very liberal date being set for BahaMar's opening in October, we have some serious steering to do.


All of this having been made worse by a newly implemented Value Added Tax in January, 2015. The projected tax-take for the last two quarters of the previous fiscal year was $150 million, albeit unconfirmed. The total yearly projected tax-take is slated at just about $300 million.


What's even more concerning as the new VAT take is added into the mix, a weaker than normal growth trend, and with ratings agencies like S&P wanting us to show more wisdom with our finances, the government has seen fit to pay the workers at BahaMar their salaries to the tune of $7.5 million and have thusly foregone some of their debt obligations for a short time. We hope!


If this were to be a prolonged trend, with VAT gains being used to support BahaMar's opening, with no idea if the resort will make what it claims it can make in this economy, with this BahaMar project already estimated at having received over $1 billion in concessions that may not be in dollar figures account to value not being placed on other areas, in addition to BahaMar having anywhere between 25% to 30% of our tourism revenue when you account for air arrivals, rooms, amenities, entertainment, employment and other related expenditures as a result of tourism activity, one cannot say that S&P is not justified in their approach to cautioning us on a downgrade at their next visit and assessment of The Bahamas.


As this author had mentioned before with regard to an IMF consultation assessment done back in February of 2015, we just could not see, outside of the IMF being diplomatic and calming through times of change and chaos, could any favourable assessment be made with the prevailing matter of BahaMar the way it was even back then, in addition to other matters highlighted and raised.

One can only hope for better for the future. But cautions being raised on the pending S&P downgrade leaves us a little dispirited and looking for solutions.


While a potential downgrade was not something expected to take place on the back of the stumbling of the BahaMar project, particularly when the budget for the project was pegged at $3.5 billion, but we hope the wizards at The Ministry of Finance could persuade the ratings agencies to look at other areas of this economy in an attempt to show more favourable prospects in both long and medium term.

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