Intrawest – the latest!

Well, the 2010 Winter Olympics have come and gone, and the big question on everyone’s lips is, “Who won?” Perhaps the question should be re-phrased as, “Which country was the most successful?” At the end of the day, does that really matter, when taken in the context of the true Olympic spirit, coined by the founder of the International Olympic Committee Pierre de Coubertin, who stated “The important thing is not to win, but to take part.”

Before the Games, I started to think about what might end up as the biggest headline, or most newsworthy event of the Games. Would it be Lindsay Vonn’s shin, Great Britain’s chances of even getting a medal (which they did, and a gold at that in the women’s skeleton) or record-breaking viewing figures for the curling? There – I’ve gone and broken my New Year resolution to take curling seriously this year.

As it turns out, perhaps the biggest headline from the games will be the tragic death of the Georgian athlete who crashed during a training run in the Luge event before the Olympics opened.

A potentially momentous event that at one time threatened to supersede all these wasn’t even a sporting story at all, but had to do with the potential sale of the Whistler ski area, the site of the Alpine events at the Winter Games, slap bang in the middle of the competition!

It’s important to provide some background in order to understand how and why this all was coming to a head. Back in the giddy days of 2006, Fortress Investment Group, a private equity firm and hedge fund, purchased Intrawest in a leveraged buyout for $2.8 billion. The premise behind the deal was that condo sales slope-side would provide the funds to repay the $1.7 billion in debt that was taken on to finance the investment.

“If only we knew then what we know now”, so the saying goes. Good old hindsight. The state of the global economy in 2010 is in stark contrast to what it was at the time of the buyout. Property prices have plummeted, the resort industry has been struggling, and institutions are having a tough time raising money in restricted credit markets to meet loan commitments. This is exactly what has happened to Intrawest.

Back on October 23rd of 2009, Intrawest Holdings missed a $524 million installment on their loan, and although a 60-day extension was achieved, it was still unable to come up with the funds on time. The composition of Fortress’ creditors provides an ironic twist. In addition to JP Morgan and David Kempner, Lehman Brothers – which collapsed in September 2008 and was “allowed” to fall into bankruptcy – is purportedly Fortress’ major creditor, and is motivated to recover as much money as it can as it unwinds its own financial obligations.

Without sufficient cash to repay debt, in the face of creditor pressure it seems Intrawest has had to resort to selling assets. As far as actual sales are concerned, in November of 2009, Intrawest sold its Copper mountain ski resort to Powdr (a company based in Salt Lake City and which itself owns eight other ski resorts) for an “undisclosed sum” (although speculation has it that it was worth about $100 million). Then, on January 28th 2010, Intrawest announced it was selling its Panorama Mountain Village ski resort in British Columbia to local homeowners and businesses. Less than a week later, Intrawest sold all of its real estate holdings at Squaw Valley ski resort in California to Squaw Valley USA, which already owns on-mountain operations at Lake Tahoe ski resort in Olympic Valley, California: again, the amount was not disclosed. Following this up, on February 9, 2010, Intrawest announced it was selling is interests in Florida’s Sandestin Golf & Beach Resort to the Florida-based Becnel family, the real estate of which includes cottages, homes, condos and hotel properties, as well as a marina, shops and restaurants.

The big news in the middle of this however was tied to Intrawest’s press release on Janaury 20, 2010, which merely stated:   “There have been inaccurate and misleading media reports surrounding Intrawest today. Fortress Investment Group continues to own and control Intrawest and all of its properties. Serious discussions with Intrawest’s lenders are ongoing regarding refinancing and the Company continues to operate “business as usual” at all of its resort properties. Intrawest is looking forward to the success of the 2010 Olympic and Paralympic Winter Games”.

The release came after ads appeared in major newspapers on January 19th announcing that lenders represented by Wilmington Trust FSB would hold a public auction to sell their interest in the company. That auction was scheduled to take place on February 19th, and included was Intrawest’s jewel-in-the-crown property, Whistler-Blackcomb.

There has been much speculation (read “suspicions about motives”) as to why the auction was scheduled for the middle of the Olympics. Daniel Fannon, a hedge fund analyst at Jefferies & Co. called it a “marketing tool”, aimed at fetching the best price for Whistler while the world’s attention is fixed on the games. Pretty smart in my view. Others have deemed it a pressure tactic. Will Marks of JMP Securities suggests it was merely a threat to achieve affirmative action by Intrawest.  One realtor called it “irresponsible”. Whatever the angle, there is a widely held view that the lenders had grown impatient with the unwillingness of Intrawest and Fortress to face the tough decisions that had to be made.

While a hurdle for potential investors was the short time frame between the announcement and the scheduled auction date (which would mean raising capital at short notice a challenge), there was much talk of Vail Resorts being in the running to take over the debt and eventually gain control of Whistler. Although potentially valued at $250 million, in this day and age, finding any buyer might prove difficult. Kai Li, a professor of finance at the University of British Columbia said “Given the current economic condition, auction of assets at a fire sale price does not bode any good. So the likelihood of an auction is extremely low due to lack of buyers and bad prices for the lenders”. Barnett, the newspaper publisher, noted “There are a lot of things that look more promising than the ski and recreational real estate businesses that have been built around aging North American baby boomers. And the buyer(s) need to decide if they are in the resort operation business or the real estate development business, something investors could never really figure out about Intrawest”.

An alternative to the auction was that Intrawest could file for Chapter 11 bankruptcy protection under the U.S. Bankruptcy Code. This strategy would protect Intrawest from creditors and buy some time by allow it to continue to do business as control passes to a trustee.

Intrawest and Fortress have been pretty non-committal in response to requests for comment. “Calls to Fortress went unanswered” or “Executives at Intrawest and Fortress could not be reached” were common among many reports. However, Ian Galbraith, Spokesman for Intrawest did mention that “serious discussions with Intrawest’s lenders are ongoing regarding refinancing”. Even the CEO of Fortress, Dan Mudd, was on CNBC and commented that they wanted to manage their way through the crisis and realize the full value of the investment.

As it turned out, the auction was postponed for a week, but still scheduled to occur right before the end of the games, and then there was another delay until March 1st. That was yesterday. At the time of writing, there are reports that a deal has been reached which includes the injection of more equity into the company. As reported by Bloomberg News, and according to “a person with knowledge of the talks”, after a $150 million additional equity injection by Fortress (or its funds), Intrawest’s remaining $1.2 million of debt would be divided into a senior tranche of $800 million, on which it would pay 10% interest, and a mezzanine tranche of $400 million on which it could pay as much as 17%, and which may depend on payment terms. According to The Wall Street journal, with the new loans, the debt’s maturity has been extended by as much as four years. April 16 has supposedly been set as a deadline to complete negotiations.

So there you have it – just waiting for confirmation! An interesting but not unfamiliar history lesson. Continue to buy up real estate as part of the housing bubble with large amounts of debt, bubble bursts, prices go down, sales screech to a halt, cash evaporates, loan notes become due and unpaid, creditors threaten, assets (reluctantly) sold off to reduce debt and with credit tight remaining debt re-financed at terms very much in favor of the lender. What – the banks win again? Bet someone makes off with a nice bonus!

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