The contractors' legal counsel argues that the terms of the bid and the DIP facility give Penn National an unfair advantage over would-be competing bidders. Moreover, they argue that neither the DIP facility nor the sale may be approved over the objection of the statutory lienholders "as a matter of law" and, "based upon the onerous and commercially unreasonable terms proposed by the prospective buyer, the M&M Lienholders and Contractor Claimants do not consent."

Penn's proposed offer, submitted early last week, includes a $50-million purchase offer for the project and $51.5 million in debtor-in-possession financing that would be forgiven if Penn is awarded the property. The contractors argue that if the proposed stalking horse bid is approved by the court then any competing bidder--"in addition to having to repay the entire DIP Credit Facility, which includes all of the Proposed Stalking Horse's reasonable out-of-pocket expenses, accrued interest, and the 2% "Upfront Fee"--would also be required to pay an additional fee equal to 5% of the DIP Credit Facility, or approximately $2.57 million as the price of admission, before the breakup fee is even taken into account.

"The Sale Motion anticipates that the stalking horse bid will repay the Proposed Stalking Horse the entire value of the DIP Credit Facility from first dollars of any bid such that, despite a competing bidder having to post a bid of $105 million or greater, the Proposed Stalking Horse gets to credit bid its $51.5 million priming lien. First priority, statutory lienholders, however, are precluded from placing a credit bid that counts as a 'qualified bid' unless they hold a judgment or order that determines their liens to be in first position as a matter of law.

"These bidding restrictions are unfair, will chill bidding, will preclude otherwise lawful credit bids from competing for the Project, and will depress the price paid for the Project. The proposed bid procedures will guarantee that the [Penn National] Bid is the winning bid and the amount of cash that will be distributed to the first lien position, statutory lienholders will be depressed."

In conclusion, the contractors' say the court should deny the DIP and sale motions should be denied on their present terms and should only be approved with "terms that provide a concrete benefit to the estate and protect the interests of first priority statutory lienholders, including the right to credit bid their first priority liens."

Fontainebleau and Penn National have yet to respond to the objection in court.

At a cost of about $2 billion, about 30 floors of the 63-story tower anchoring the development have been fully completed and require air conditioning, while the top of the building is largely without a roof. Penn's offer disclaims liabilities for Fontainebleau's existing financial burden, which includes an estimated $1.6 billion in bank loans and bondholder debt, and the aforementioned contractors' liens. Penn defends its offer by saying the project's value is no longer worth any more than the estimated $1.46-billion cost to complete the project. An appraisal earlier this year pegged the value of the stalled development at approximately $320 million.

"Despite the impressive scale of that building, our view is its value is little to nothing because the cost to complete [the project] is at the edge of its value in our judgment," Penn National chief executive Peter Carlino told analysts last month.

Instant Insights /

Fontainebleau Contractors Object to Penn's Bid

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