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LAS VEGAS-The Term lender Steering Group for the stalled Fontainebleau development here filed a motion in bankruptcy court last week to have the Ch. 11 reorganization converted to Ch. 7 liquidation. On top of the approximately $1 billion they loaned to help get the $2.9-billion project to 70% completion, the term lenders say an additional $16 million in cash collateral has been depleted during the bankruptcy process so far with “no meaningful progress” to show for it, and that it now believes there is “no reasonable likelihood” that the debtors can successfully reorganize and complete the project.

The members of the steering group include Brigade Capital Management LLC, Canyon Capital Advisors LLC, the Carlyle Group, Guggenheim Investment Management LLC and Highland Capital Management LP. The group’s motion comes on the heels of the denial of Fontainebleau’s motion in a related lawsuit to force other lenders for the project to hand over $656 million in promised late-stage financing they refused to provide, stalling the project and leading to the Ch. 11 filing.

“With completion of the project by the debtors not possible, a sale of the project to a third party and liquidation of the remaining assets is the only viable course to realize any meaningful value for creditors,” the term lenders state in their motion.

Fontainebleau, which has not responded to the motion and isn’t commenting on the bankruptcy process, disclosed recently that it is in talks with potential investors, one of which is believed to be Penn National Gaming. In arguing against continuing the current process, the term lenders allege that process has been stifled due to “pervasive conflicts of interest that exist among the debtors on the one hand, and their principals, officers, managers, affiliates and related parties on the other hand.”

In backing up their conflict allegation, the term lenders state that the main man behind the development, Miami developer Jeffrey Soffer, has recently engaged in discussions with term lenders to promote a transaction in lieu of Ch. 11 sale. In addition, the term lenders cite Soffer’s control of Turnberry West Construction, which has filed a $675 million claim against the project including $63.9 million for its own fee.

“Given that the debtors’ shareholders lack any economic stake in the debtors, efforts by Mr. Soffer to formulate a transaction under which he will receive some consideration or benefit will, unless he is forced to negotiate at arm’s length with an independent trustee, divert value that belongs to the estate from creditors,” states the motion.

The term lenders are asking for an independent trustee appointed to handle the liquidation because the aforementioned conflicts faced by the debtors “will poison any sale process.” A hearing on the motion is scheduled for Oct. 28, 2009.

A couple of weeks ago, analyst Bill Lerner of Union Gaming Group estimated that any buyer would need $2 billion to buy out the existing project debt [at a steep discount] and finish construction. The existing project debt is approximately $1.5 billion and the estimated cost to complete the project is also $1.5 billion, according to multiple reports.

At around the same time Lerner provided his estimate, Jay Cristol, the judge overseeing the bankruptcy case, perhaps foresaw the Term Lenders motion. “I think we can go three weeks [more], but not much longer,” the Miami Herald quoted him as saying. “I’m very fearful the wheels are coming off.”

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