Suncoast Casino
African Real Estate Deal of the Year 2002
South Africa's ZAR1,912 million ($200 million) Suncoast casino deal breaks new ground in several ways. It is the first project financing in the country to use an equity bridge facility. It is also the first project where the debt service reserve facility is not prefunded but resembles a default grace period in repayment profile. Financing breaks down into a ZAR600 million equity bridge facility, senior debt facility of ZAR675 million ? part of it is the debt service reserve facility ? and operating profits. Investec Bank solely arranged the financing package, which closed in September 2002. Nedcor Investment Bank and Nedcor Ltd were jointly underwrote the debt. Sponsors Tsogo Sun Holdings and Johnnic Holdings form the project company Tsogo Sun KwaZulu-Natal (Pty) Ltd.Suncoast is being developed in three phases over four years and the loans have been structured accordingly. Phase I is the construction of the casino and restaurant, phase II is the construction of the cinema and retail development, and phase III is the final part, construction of the hotel. Each phase will become operational as construction completes. The casino is part of this entertainment complex and holds one of only two licenses to operate in the Durban area. Under an agreement with the KwaZulu-Natal Gaming Board the casino will have exclusivity in the area for 15 years. This was of some comfort to the lender when putting the financing together. Perhaps the most important aspect is the equity bridge facility. It was put in place by the lenders and was designed to provide an edge to the arranger in winning the mandate. In place of equity, lenders put up debt as a bridge and this will be put into the deal by the sponsors at a later date. One source working on the deal says: ?The bridge facility was very innovative. For the sponsor it added a huge amount of value to the deal as they could bring equity in much later. The bridge facility had an equity guarantee as its security. It was done to maximise the shareholder return.? The bridge also gave the sponsors time to negotiate senior facilities, the security structure and the terms and conditions properly, which made the deal stronger.According to those working on the deal, the sponsor's team was strong with a clear idea of what was wanted. This was important in getting the equity structure into place and finalising the rest of the deal quickly and smoothly. The operating profits facility is also an interesting aspect. It kicks in after phase I completes and will be repaid with revenues earned in phase I. The deal has been structured around the inherent retail risk that lies in financing a casino. Revenues are solely reliant on customer footfall ? so demographics, GDP, local infrastructure and the need for a casino all had to be closely studied. However, one source working on the deal says: ?There was still a risk that studies are drastically wrong.? An independent team of well-established casino experts and economists carried out due diligence, which mitigated the risk for lenders somewhat. Another consideration was political risk. Brigitte Baillie of Webber Wentzel Bowens says: ?There was a risk that casino licensing laws could change. This was mitigated through the legislative regime and political stability of the government ? a unilateral decision to cancel the license would be highly unlikely. Plus, South Africa common law would give a right of legal action should this happen. It was a kind of security package.? The sponsors are providing support to the lenders in the case of certain events occurring which might affect the borrower's ability to repay the debt facilities.Back in the sponsors' court, Tsogo and Johnnic benefited from an unusual debt reserve service facility. One banker says: ?The senior debt facility of ZAR675 million included a senior reserve facility which can be drawn on to make payment sunder the senior debt facility. We choose this due to the risk profile and economics of the project. Bearing in mind, if there was a default the shareholders, nor the government, would be paying out, so we had to work it out. It was a negative, anyway, for the shareholders to have cash sitting in reserve.? Again, this alternative to a cash lock-up gave Investec a leading edge on its rivals. Financial close was reached within ten months on the Suncoast deal. There was no turnkey construction contract specific to the project as it was managed to a budget rather than having a fixed price, date certain contract. The contract is in the hands of a joint venture consortium comprising LTA, Grinaker and Fivukeli. The lender was part of the project management committee.
Tsogo Sun KwaZulu-Natal (Pty) Ltd
Location: Durban, South Africa
Description: Financing of a casino as part of an entertainment complex
Size: ZAR1,912 million ($200 million)
Debt: ZAR675 million
Equity: ZAR600 million as an equity bridge facility
Lead arranger: Investec Bank, South Africa
Sponsors: Tsogo Sun Holdings and Johnnic Holdings
Legal advisor to lenders: White & Case
Legal advisor to sponsors: Webber Wentzel Bowens
Construction: Grinaker, LTA and Fivukeli
South Africa's ZAR1,912 million ($200 million) Suncoast casino deal breaks new ground in several ways. It is the first project financing in the country to use an equity bridge facility. It is also the first project where the debt service reserve facility is not prefunded but resembles a default grace period in repayment profile. Financing breaks down into a ZAR600 million equity bridge facility, senior debt facility of ZAR675 million ? part of it is the debt service reserve facility ? and operating profits. Investec Bank solely arranged the financing package, which closed in September 2002. Nedcor Investment Bank and Nedcor Ltd were jointly underwrote the debt. Sponsors Tsogo Sun Holdings and Johnnic Holdings form the project company Tsogo Sun KwaZulu-Natal (Pty) Ltd.Suncoast is being developed in three phases over four years and the loans have been structured accordingly. Phase I is the construction of the casino and restaurant, phase II is the construction of the cinema and retail development, and phase III is the final part, construction of the hotel. Each phase will become operational as construction completes. The casino is part of this entertainment complex and holds one of only two licenses to operate in the Durban area. Under an agreement with the KwaZulu-Natal Gaming Board the casino will have exclusivity in the area for 15 years. This was of some comfort to the lender when putting the financing together. Perhaps the most important aspect is the equity bridge facility. It was put in place by the lenders and was designed to provide an edge to the arranger in winning the mandate. In place of equity, lenders put up debt as a bridge and this will be put into the deal by the sponsors at a later date. One source working on the deal says: ?The bridge facility was very innovative. For the sponsor it added a huge amount of value to the deal as they could bring equity in much later. The bridge facility had an equity guarantee as its security. It was done to maximise the shareholder return.? The bridge also gave the sponsors time to negotiate senior facilities, the security structure and the terms and conditions properly, which made the deal stronger.According to those working on the deal, the sponsor's team was strong with a clear idea of what was wanted. This was important in getting the equity structure into place and finalising the rest of the deal quickly and smoothly. The operating profits facility is also an interesting aspect. It kicks in after phase I completes and will be repaid with revenues earned in phase I. The deal has been structured around the inherent retail risk that lies in financing a casino. Revenues are solely reliant on customer footfall ? so demographics, GDP, local infrastructure and the need for a casino all had to be closely studied. However, one source working on the deal says: ?There was still a risk that studies are drastically wrong.? An independent team of well-established casino experts and economists carried out due diligence, which mitigated the risk for lenders somewhat. Another consideration was political risk. Brigitte Baillie of Webber Wentzel Bowens says: ?There was a risk that casino licensing laws could change. This was mitigated through the legislative regime and political stability of the government ? a unilateral decision to cancel the license would be highly unlikely. Plus, South Africa common law would give a right of legal action should this happen. It was a kind of security package.? The sponsors are providing support to the lenders in the case of certain events occurring which might affect the borrower's ability to repay the debt facilities.Back in the sponsors' court, Tsogo and Johnnic benefited from an unusual debt reserve service facility. One banker says: ?The senior debt facility of ZAR675 million included a senior reserve facility which can be drawn on to make payment sunder the senior debt facility. We choose this due to the risk profile and economics of the project. Bearing in mind, if there was a default the shareholders, nor the government, would be paying out, so we had to work it out. It was a negative, anyway, for the shareholders to have cash sitting in reserve.? Again, this alternative to a cash lock-up gave Investec a leading edge on its rivals. Financial close was reached within ten months on the Suncoast deal. There was no turnkey construction contract specific to the project as it was managed to a budget rather than having a fixed price, date certain contract. The contract is in the hands of a joint venture consortium comprising LTA, Grinaker and Fivukeli. The lender was part of the project management committee.
Tsogo Sun KwaZulu-Natal (Pty) Ltd
Location: Durban, South Africa
Description: Financing of a casino as part of an entertainment complex
Size: ZAR1,912 million ($200 million)
Debt: ZAR675 million
Equity: ZAR600 million as an equity bridge facility
Lead arranger: Investec Bank, South Africa
Sponsors: Tsogo Sun Holdings and Johnnic Holdings
Legal advisor to lenders: White & Case
Legal advisor to sponsors: Webber Wentzel Bowens
Construction: Grinaker, LTA and Fivukeli
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