Credit Suisse Group loses Midas touch on luxury resorts around the world.
To Jean-Pierre Boespflug, French-born developer of a ski resort in the Idaho outback, the $250 million loan from Credit Suisse Group was too good to pass up.
Dealmakers from the Swiss bank’s Los Angeles office arrived to pitch Boespflug on the unorthodox loan in 2006, just when his Tamarack Resort was lining up financing for its base village beneath newly cut ski trails.
Unlike regular construction loans, which dole out enough money to complete one project at a time, this one would let him build several clusters of homes and condominiums at the resort simultaneously. The loan would cover just a portion of the development cost. The idea was that proceeds from selling units in one building would be used to finish the next, and so on.
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As long as the homes and condos sold, Boespflug would be fine.
“It was like putting candy in front of a 4-year-old,” Boespflug says. “It looked like a dream.”
Boespflug signed the documents in May 2006. Credit Suisse collected its fee and sold the loan to a syndicate of investors it had lined up. Mutual funds run by Morgan Stanley’s Van Kampen Funds unit bought the loan, according to regulatory filings.
Then the real-estate market went south, and sales at Tamarack slowed. In December 2007, just 19 months after taking the Credit Suisse loan, Boespflug missed a $5 million payment.
Tamarack is one of at least eight high-end projects in the U.S. West, Florida and the Caribbean financed by Zurich-based Credit Suisse that are either in default or in bankruptcy.
Those failures reverberate in the financial system because Credit Suisse sold loans to investors who, in turn, put them into mutual funds or packaged them into securities called collateralized-loan obligations.
CLOs are similar to the collateralized debt obligations that banks crafted out of subprime residential mortgages: bundled securities that are divided into tranches, each of which has a different credit rating and interest rate.
Both CDOs and CLOs paid interest that often exceeded that of conventional bonds. Both were popular when real estate was hot, and both are hurting now as the loans inside them go bad.
Many banks matched borrowers with eager investors during the real-estate boom. Credit Suisse, Switzerland’s second-largest bank, was unusual in that it made big loans — $250 million to $675 million each — and because it almost cornered the market on syndicated loans to posh developments such as Tamarack, says Joseph Snider, senior credit officer at Moody’s Investors Service, which rated the projects for a fee so that Credit Suisse could sell the debt.
The Swiss bank has had extensive operations in the U.S. ever since it acquired a majority stake in New York-based investment bank First Boston in 1990.
It then bought investment bank Donaldson Lufkin & Jenrette for $13.4 billion in 2000.
In February, Credit Suisse reported a record loss for 2008 of $7 billion, in part because of its exposure to toxic U.S. real-estate-related debt.
In its quest to loan money to the ski- and golf-resort operators, the bank was unusually aggressive.
“Usually, bankers don’t come to you; you go to them,” says Boespflug, a former executive at computer networking company Cisco Systems who taught skiing at Lake Tahoe on weekends when he worked at technology companies in the San Francisco Bay Area.
“They came to us with a very fancy PowerPoint presentation.”
The list of Credit Suisse loan clients is synonymous with luxury: $375 million went to the Yellowstone Club, a private ski and golf resort in Montana; $540 million to Lake Las Vegas resort, a 3,592-acre golf community in Nevada; $275 million to Promontory, a high-end ski enclave in Utah; $400 million to Turtle Bay Resort, a beach development in Hawaii; and $675 million to Ginn Resorts in Celebration, Fla.
Arranging the loans paid well. Credit Suisse made $7.74 million in fees from the Yellowstone loan alone, according to court documents.
Credit Suisse bankers in New York sold the loans to syndicates of investors at mutual funds, insurance companies and hedge funds. Babson Capital Management, a Boston company that manages $108 billion, and its affiliates owned $40 million of the Yellowstone loan at one point, according to a list of owners obtained by Bloomberg News.
The Bill & Melinda Gates Foundation held $1.8 million, according to the list. The Gateses are members of the Yellowstone Club.
“It was a potent machine that they had,” Snider at Moody’s says. “And it worked for a while.”
Most of the projects got going in the late 1990s and early 2000s, when real-estate prices soared, prompting developers to build extravagant resorts. The Yellowstone Club installed ski lifts to serve small clusters of homes, at great expense.
When Yellowstone declared bankruptcy in November, it listed among its assets a trove of pricey furniture and baubles, including two winged griffins, sculpted from marble, that Yellowstone bought for $19,250.
Some of the developments were in remote locations and thus were likely to attract only the most adventurous condo buyers. Tamarack is 100 miles north of Boise, up a two-lane road, and has no commercial air service.
Boespflug says the lead banker when he took his Tamarack loan was Arik Prawer, who is now a Credit Suisse managing director. “These were young technocrats,” Boespflug says. “The bosses were not there. They were not at the table.”
Prawer didn’t return phone calls and e-mails seeking comment. Credit Suisse spokesman Duncan King says Prawer and others who worked on the loans decline to comment.
Boespflug says Prawer and his colleagues solved a persistent problem in the development business: having to start the borrowing process all over each time you want to erect another building.
The hitch in the Credit Suisse loan was that it didn’t include enough money to finish the entire project, forcing the borrower to pay for much of the development with proceeds from unit sales, Boespflug says. If sales slowed, which seemed a remote possibility in 2006, Tamarack wouldn’t have the money it needed to finish the buildings.
The other hitch was that because of the revolving feature of the loans, they required a huge pile of difficult-to-comprehend spreadsheets and terms. “They had the best of intentions, but they created a monster,” Boespflug says. “Nobody could see the consequences of a 2-foot-thick pile of documents.”
Today, the consequences are clear: Tamarack has closed. A receiver took over after Boespflug and his co-owner, a Mexican industrialist named Alfredo Miguel Afif, defaulted. Six buildings in the base village remain incomplete, as are a cluster of town homes. They now stand sealed from the wind and snow.
The Tamarack loan, maturing in 2011, had a coupon of 8 percent, according to the annual report for the Van Kampen Dynamic Credit Opportunities Fund, which owned it as of July 31.
Some investors milked that yield by blending the loans into CLOs, which are divvied up into tranches. The riskier tranches carried higher interest rates.
One buyer of the Yellowstone Club debt who spoke on condition that he not be named says there’s nothing sinister about the Credit Suisse deals. The whole real-estate market is in trouble, he says, and fledgling developments like Tamarack need constant real-estate sales because they don’t generate enough cash to survive without them.
“It has nothing to do with there being something flawed about Tamarack or something wrong with the Yellowstone Club,” the buyer says. “Everything was overheated. There was too much debt on everything.”
Boespflug and Afif of Tamarack didn’t distribute any money to themselves out of their Credit Suisse loan, according to Snider. Boespflug says all he wanted to do was build his resort, quickly. Credit Suisse obliged.
Boespflug blames himself for the fiasco. “I could have said ‘no’ to the loan,” he says. “It looked so good, though.”