Latin Finance - April 2008 - 34

Caribbean tourism project finance Riding Out the Waves by Ben Miller ike borrowers worldwide, developers of large resort and residential tourism projects have had to locate new sources of funding or change building strategies to accommodate a lack of access to international markets. Woeful conditions strike at a time when developers, spurred on by consecutive years of growth and stability in the region’s beach-laden countries, were just starting to unearth diverse sources of funding. Money came easily in the first half of 2007. Local and foreign banks were active and international investors loved the bond deals, as issuers tried to follow in the wake of the Dominican Republic’s Cap Cana. But high yield is tanking and there is a particular aversion to anything real estate related. “Unless the project has extremely compelling economics, it will have difficulty accessing the kind of funds it could access before,” says John Tonelli, head of EM mortgage finance at Bear Stearns. He adds that viable borrowers would need a strong sponsor and robust pre-sales. Developers who cannot locate alternative funds are being forced to decelerate construction. “Unlike 10 years ago, most resort projects now have a very large residential component to enhance the hotel and overall resort business,” says Tonelli. This, he explains, means there is more capital to be gained from pre-construction sales. Others may have to go back to the bank market at stricter terms, says Kevin Clark, senior vice president, corporate and commercial banking, at Scotiabank. Scotia has seen increased interest from mid-sized Eastern Caribbean developers. “It’s a good opportunity for lenders,” he says, adding that this is especially true for those with a long-term view who can withstand volatility. Spreads are widening, and borrowers are facing tighter covenants, higher equity requirements, and possibly shorter tenors. L There is increasing demand for tourism project development funds, particularly in Brazil. But the shutdown of the high yield market has forced developers to look harder for cash. Cap Cana sales, Hazoury says. From a buyer’s perspective, he claims, the quality is most important, not wider market issues. Cap Cana had hoped to follow its $250 million 2006 debut international bond issue with a similarly-structured deal of equal size, in November, when credit markets turned. The company ended up getting a $100 million one-year bridge from Morgan Stanley and Deutsche Bank instead. The issuer is focusing on being prepared to tap when the markets recover, but also has other options. “We’re finding the capital markets aren’t the only way to go,” Hazoury says. The main alternative is private investment – through partnering with local developers – as well as the local market. Public equity, which Cap Cana does not rule out completely, would be tough. Where partnerships are used, Cap Cana brings in specific developers for individual parts of the projects, who offer the project both capital and expertise. As with public equity, an investor buying into Cap Cana at the corporate level is not likely in the near term, but it is not off the table entirely. As for tapping the Dominican Republic’s growing local markets, Hazoury says the development has sold portfolios of purchase and sales contract receivables to banks. The banks have not securitized them yet, he says, although that might become an option. Eventually, Cap Cana expects to create a pool of credits that can easily be securitized. Domestic bonds or bank debt might also be an option as local markets deepen. Pre-Sale Fortification In another testament to pre-sales, Panama’s Newland International became the only resort bond deal to squeak through hostile markets. It did so at a discount, selling $220 million to finance the Trump Ocean Club in Panama City. The 9.500% coupon priced to yield 10.250%, well wide to 9.375%9.625% guidance, during a day of relative calm. “What got the transaction done was the high-level of presales,” explains Bear Stearns’ Tonelli, whose bank led the placement. The project was almost 70% pre-sold, which left investors with construction risk as the principal consideration for the tall, iconic building in the center of Panama City. This contrasts with a low-rise resort project such as Cap Cana, where the risk concern tends to be more with sales than construction. Caribbean Calm The city-sized Cap Cana project on the Dominican Republic’s east coast is employing the slowdown strategy. “We can manage our liquidity by adjusting our schedule,” says Alex Hazoury, Cap Cana’s vice president of finance. “The interest is still there. We’re sitting on the sidelines, waiting to see how to continue developing the project.” Cap Cana has large segments in operation and is boosted by pre-sales. It expects to have 1,000 properties by the end of the year, which will offer a solid source of revenue. North America’s housing market problems have not affected 34 LATINFINANCE April 2008

Latin Finance - April 2008

Table of Contents for the Digital Edition of Latin Finance - April 2008