Intrawest refinances |

Intrawest refinances

Analyst: Debt payment will mean less investment in Steamboat

Brandon Gee

— Intrawest successfully refinanced $1.7 billion in debt Thursday, staving off fears that Steamboat Ski and Resort Corp.’s parent company was heading toward bankruptcy.

A syndicate of lenders holds the Intrawest debt, and refinancing required unanimous approval from the group. The final holdout in striking the deal appears to have been London-based Barclays, whose president, Robert E. Diamond Jr., is the cousin of Ski Corp. President Chris Diamond.

Intrawest faced a Thursday repayment deadline – and a potential bankruptcy – if refinancing was not accomplished.

Vancouver, B.C.-based Intrawest will not disclose the terms of the deal, spokesman Ian Galbraith said. Intrawest is a privately held company owned by New York-based Fortress Investment Group, a public hedge fund and private equity firm.

“I suspect we may not really know what the terms are going to be until the third quarter conference call with Fortress,” said Jackson Turner, an analyst with New York-based Argus Research Company.

Given the current global credit crisis, Turner said, the renegotiated terms are probably not favorable to Intrawest and will affect the company’s ability to invest in ski resorts such as Steamboat. Turner said each percentage point increase in the debt’s interest rate constitutes an additional $14 million Intrawest has to pay each year.

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“Intrawest is going to cut back services in order to pay for the increased cost of the debt,” Turner said.

In addition to capital improvements such as restaurants, lifts and new ski runs, Turner said Intrawest resorts may also be forced to cut back on staffing and their hours of operation. Turner monitors Fortress for Argus Research Company.

In addition to Steamboat and Whistler Blackcomb, Intrawest has interests in resorts including Copper Mountain and Winter Park. The company employs 22,000 people. Galbraith would not answer questions about whether the refinancing would affect Intrawest’s future investments in its resorts.

“We are very pleased to have reached an agreement with our lenders, particularly given the challenges of the global credit markets,” Bill Jensen, chief executive officer at Intrawest, said in a news release. “The support Fortress and our lenders have shown underscores their confidence in Intrawest and will enable us to continue to execute on our long-term strategic plans. Intrawest has great assets, a sound business model and a solid track record.”

Overblown speculation

Intrawest has been subject to rampant speculation in the U.S. and Canadian press this week. But, even prior to Intrawest’s late-afternoon announcement that it had successfully refinanced, Turner said fears of bankruptcy were overblown. The reason, Turner said, is that bankruptcy would have been in nobody’s best interest.

It certainly wouldn’t have been in Intrawest’s best interest, Turner said, and there was also strong public and governmental pressure to strike a deal because Vancouver and Whistler-Blackcomb play host to the 2010 Winter Olympics.

Most importantly, though, bankruptcy wouldn’t have been in the best interest of the creditors. Turner said even if the Thursday repayment deadline was not met, the loan syndicate probably wouldn’t have demanded repayment and would have continued efforts to strike a deal.

“The assets that Intrawest owns right now – real estate, ski lifts – are not what one would think are valuable things to own as the result of a bankruptcy filing,” said Turner, who said Intrawest owns few assets that creditors could have turned around and sold immediately. “Right now, vacation property is not something one wants to own and sell. And a ski lift is only worth something if it’s moving skiers. It’s kind of pointless as a backyard flower bed or whatever.”

But similar forces also made a deal hard to reach. Intrawest’s business model – which relies on discretionary spending on resort travel and vacation real estate – is particularly vulnerable to what Turner called the “worst credit market turmoil since the Great Depression.”

In a report to the Steamboat Springs City Council earlier this week, Deloitte economist and Steamboat resident Carl Steidtmann predicted a major drop in consumer spending as the 2008-09 ski season approaches. Steidtmann said consumer spending increased to 72 percent of gross domestic product in the U.S., which dwarfs any other country in the world. As consumers cut back, he predicts consumer spending to return to a level below 60 percent of GDP.

And although he wasn’t specific about Steamboat or Intrawest, Andy Wirth, chief marketing officer for Intrawest, told the Steamboat Pilot & Today earlier this month that a reported 17.7 percent decrease in bookings for Vail Resorts’ owned and managed hotels “is indicative of what all of Colorado is seeing as far as booking trends.”

Intrawest’s exposure to a weak economy would push lenders to demand a higher interest rate, Turner said.

In 2006 Fortress financed its multibillion purchase of Intrawest mostly with debt at an interest rate of 6.4 percent, Canadian newspaper The Globe and Mail reported Wednesday.

Shares plunge

Barclays appears to be the loan syndicate member that pushed hardest for a higher interest rate on the Intrawest debt.

New York-based Lehman Brothers was among the group of lenders that financed Fortress’s purchase of Intrawest. Barclays took over Lehman Brothers last month, when the firm became one of the first and largest casualties of the subprime mortgage fallout that has triggered global economic chaos.

Turner said Barclays most likely took Lehman’s place in the Intrawest loan syndicate. It is Turner’s understanding that Barclays was the sole holdout in the refinancing deal that appeared close throughout the week.

“If it is Barclays and it is something they took over from Lehman, this would be one potential mine in a field full of mines,” Turner said prior to Intrawest’s announcement that they had refinanced the debt. “Barclays may be balking at the idea of being a member of this syndicate because of the idea that they’ve got their hands full with toxic mortgages.”

However, Turner said Barclays also has its hands full with Lehman’s bankruptcy and did not want to throw an Intrawest bankruptcy into the mix. A phone call and e-mail to Barclays officials, seeking confirmation of their involvement in the deal, were not returned Thursday. Aside from confirming that the Barclays president is indeed his cousin, Chris Diamond did not comment Thursday.

Intrawest’s size in Fortress’ portfolio is unknown, but Turner guessed it constitutes almost 10 percent of Fortress’ $17 billion private-equity wing.

After trading at a 52-week high of $23.04, Fortress Investment Group’s shares have plunged. Shares fell 5 cents Thursday to $3.85 in 4 p.m. New York Stock Exchange composite trading.

Turner downgraded Fortress’s stock from “buy” to “sell” earlier this week.