A closer look at the size and expensive cost of the initial financing taken for Parq Vancouver, and the smaller loans it has taken to keep up with debt payments, begs the question: Is the hotel and casino complex adjusting plans to meet changing conditions or is it in debt distress?
Parq Vancouver, with its curvy, copper-tinted glass jewel of a building beside B.C. Place Stadium, opened in September 2017 in what were splashier times. It was billed as the “largest private development in B.C.” with “world-class” everything: two luxury hotels, convention spaces, an outdoor space and the city’s biggest ballroom.
Conceived in boom times as the city’s real estate and tourism markets were humming, Parq had been positioned by its owners as a “compelling and rare investment opportunity in a coveted gaming market.”
With 72,000 square feet of casino space over two floors, the facilities would “cater to the Chinese tourist, including high-end play and private gaming salons.”
But the fact that its owners were, according to a 2016 investor presentation seen by Postmedia, looking to sell half of Parq’s implied equity value a year before it opened, and before significant anti-money laundering measures would hit all B.C. casinos, suggests they were looking to offload or share some of the project’s risk even as they publicly touted its promise.
They never did secure another partner at the time and instead, at various stages, each put in more money in return for new shares.
Since then, there have been glimpses of a less-than-rosy financial situation at Parq Vancouver.
It’s a private company that doesn’t disclose financial information, but one of its co-owners is the publicly listed, Toronto-based holding firm Dundee Corp. In March 2019, Dundee reported that Parq lost $153 million in 2018. It has cited the impact of B.C.’s anti-money-laundering rules, ushered in a few months after Parq opened, but also training and marketing costs.
Those rules came into play in December 2017 after an independent review by former RCMP deputy commissioner Peter German on concerns that Chinese high-roller VIPs were buying gambling chips with massive wads of cash the could be “proceeds of crime.” A few months later, B.C. Attorney General David Eby reported that suspicious transactions flowing through B.C. casinos had dropped to $200,000 from a high of $20 million in July 2015.
One of the other original three co-owners was Las Vegas-based Paragon Gaming, which has experience running casinos in Canada and the U.S. It transferred to the Parq ownership a casino licence from the Edgewater Casino, which it managed for more than 10 years and closed when Parq opened. The license is issued by the B.C. government. The other co-owner is the PBC Group, an Ottawa-based real estate company.
In February 2019, Paragon exited the ownership completely by selling its stake in Parq to PBC for an undisclosed amount.
Now, a closer look at the size and cost of the initial financing taken for Parq, and two new, smaller loans it has sought to keep up with the debt payments, begs these questions: Is the project adjusting to meet changing conditions, as companies regularly do? Or, is it headed for debt distress?
Kin Lo, an accounting professor at the University of B.C.’s Sauder School of Business, thinks that based on information that is available, what’s happening at Parq could be either of those “two distinct stories.” Without more details it would be hard to say for certain.
Reached for comment, Parq Vancouver said it is a private company and does not disclose nor comment on its financial results. Dundee and PBC did not reply to queries.
What is known through Dundee’s public filings is that in late 2014 Parq took on $415 million US in project financing. This debt, arranged by financial institutions led by Credit Suisse Securities (U.S.A.), included a first lien loan of $265 million US (the equivalent of $344.5 million at the time) that is due in December 2020. It carries a rate of LIBOR, plus 7.5 per cent. Currently, LIBOR, which is the average of what banks in the U.K. are charging each other, is at 2.75 per cent. So this first chunk has a total rate of 10.25 per cent.
There is also a second lien loan of $150 million US (the equivalent of $195 million at the time) that is due in December 2021, which carries an even higher rate of LIBOR, plus 12 per cent for a total rate of 14.75 per cent.
These are expensive rate premiums and indicate the “high perceived risk of the project,” said Lo, but he added that lenders do tend to charge higher rates for construction loans.
To compare, however, another loan for a similar amount of $450 million US issued around the same time in 2014 to the Morgans Hotel Group for its Hudson New York and South Beach Florida hotel properties, was at a much lower rate of LIBOR, plus 5.49 per cent, with two years to maturity. This consisted of a $275-million first mortgage with a rate of LIBOR, plus only 3.64 per cent, and then higher rates for various parts of the remaining amount, according to information compiled by Baird Research.
For Parq, the annual cost of servicing its two loans at their much higher rates is in the ballpark of $27.2 million US for the first lien loan plus $22.1 million US for the second lien one, for a whopping total of almost $50 million US. Dundee hasn’t reported Parq missing a debt payment, but there have been signs it might not be making enough cash flow from its operations to cover them.
In September 2018, Dundee said the owners of Parq took an unsecured convertible loan for $20 million from an “unnamed industry investor.” The agreement had Parq issue a promissory note for the $20 million that could be convertible, at a later date, into equity. The proceeds of the loan were used “to make scheduled debt payments and to provide additional working capital for Parq Vancouver.”
In December 2018, Dundee said Parq received another unsecured loan from an unnamed industry investor for $15 million “to make scheduled debt payments.”
In both cases, the interest rates and due dates for repaying these promissory notes weren’t disclosed.
Bloomberg News reported Monday that this week, “Parq’s in a race to refinance debt in order to make an interest payment this week on a second-lien loan, according to S&P Global Ratings.”
“Parq had deferred an interest payment by one month to April 30 and its ability to pay hinges on the company refinancing its debt, S&P said earlier this month when it downgraded Parq Holdings LP to CCC, eight notches below investment grade, from B-,” according to Bloomberg. “We still believe that, absent a debt recapitalization, the company will be unable to materially address its high fixed charges and financial sustainability,” S&P said, adding there’s a risk of payment default or a debt restructuring within the next 12 months.
Debt distress happens when a company defaults on debt payments or is moving toward that. To avoid it, owners sometimes quickly seek funds by finding new buyers for parts of a company. It sometimes means selling at a steep discount in order to secure the funds. Eventually, the company has to repay these new buyers or concede equity and control to them.
Developments with solid cash flow and long-term prospects tend to, shortly after opening, refinance their entire initial construction loans at better rates, which is what happened in the Morgans Hotel 2014 loan.
In Parq’s case, the $15-million and $20-million loans it’s borrowing from unnamed parties at undisclosed rates, that are convertible into equity, for funds to help it make debt payments are dribbles compared with the size of the original debt of US$415 million.
There are many questions to ask, not only about the financial future of Parq, but also about who might ultimately have control of a project that runs on a government-issued casino licence in an area that has been drawing scrutiny.
“This appears to be a difficult situation and it will be hard to resolve,” said Jan De Roos, a professor of hotel finance at Cornell University who specializes in “valuation, financing, development and control of lodging, timeshare and restaurant assets.”