September 28, 2020

Caribbean resorts lure private equity as Canadian banks retreat


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how-to-think-about-private-equityBy Ezra Fieser Bloomberg News From Leader-Post

Even before last week’s rapprochement between the U.S. and , private equity companies from Bain Capital Partners LLC to billionaire Sam Zell’s Equity International were boosting investments in Caribbean resorts as the region’s traditional lenders scaled back operations.

While Canadian banks including Bank of Nova Scotia and of shuttered some businesses in the islands, U.S.-based private equity firms have spent $329 million US on hotel developments this year, the most in a decade, according to Real Capital Analytics Inc., a New York-based commercial real estate research company.

“Private equity makes for an interesting hero in this situation,” said Robi Das, managing director in the Miami office for Newmark Grubb Knight Frank, a commercial real estate company. “The traditional lenders have been hesitant to participate in the Caribbean. I wouldn’t say they’re out of the market, but the new debt that’s coming in is private equity.”

Struggling with some of the heaviest debt burdens in the world, Caribbean governments are seeking to take advantage of rebounding tourism as the U.S. economy recovers. In May, Zell led the approximately $500-million US purchase of Decameron Hotels Resorts, which operates in countries including Jamaica and Colombia. Now, Cuba provides a new opportunity as U.S. tourists prepare to take advantage of an easing in travel restrictions.

“The Cuba story is huge, no question,” Das said.

While investors wait and see what financial safeguards will be put in place, U.S. hotel chains including Marriott International Inc. and Hilton Worldwide Holdings Inc. said they are interested in the Cuban market or monitoring developments there.

As part of a larger international pullback, Toronto-based Scotiabank on Nov. 4 said it would close 35 branches in the Caribbean and take $109 million in losses related to three Caribbean hotel development loans. Those cuts followed Royal Bank’s sale of its Jamaica operations and Canadian Imperial Bank of Commerce’s May announcement of $123 million in losses and a $420-million goodwill impairment charge on CIBC FirstCaribbean International Bank. Royal Bank said on Nov. 21 it would shutter its wealth management business in the Caribbean.

Scotiabank, which is weighing a sale of its Puerto Rican banking unit, will continue to implement “operational efficiency initiatives,” spokesman Marcelo Gomez-Wiuckstern said in a Dec. 11 email. CIBC had no comment, spokesman Kevin Dove said via email.

Cuba’s opening to more U.S. tourists may change that trend. Five decades after closing operations in the Communist country, Royal Bank chief executive officer David McKay said Canada’s second-largest lender by assets is evaluating a return to the island.

“We see a very attractive longterm marketplace in Cuba,” Mc-Kay, said last week in Toronto.

Traditionally the dominant lenders in the region, banks were stung by a drop in tourism and falling revenue for hotels in the wake of the global financial crisis. Tourist arrivals fell by 3.6 per cent in 2009 to 22.1 million, the fewest since 2005, according to the . Revenue-per-available room for Caribbean hotels, a key measure of the sector’s health, fell seven per cent in 2008 and about 16.6 per cent the following year, according to Smith Travel Research.

The downturn ensnared projects such as Roco Ki, envisioned as a luxury development with four golf courses, a Westin hotel and $3-million US estates built on a 2,500-acre (1,011-hectare) bluff above Macao Beach on the Dominican Republic’s east coast. The development said it received $85 million US in loans from Scotiabank and the European Investment Bank. Construction stopped in 2008, leaving shells of buildings on a bluff overlooking the sea.

“The traditional lenders have been very, very slow, to return to the market, particularly for new construction,” said Parris E. Jordan, managing director at HVS Caribbean, a hotel consultancy that evaluates projects.

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