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Barbados Shores Up a Troubled Four Seasons WSJ Article By KRIS HUDSON

Mike Toy/Cinnamon 88 Resorts and Residences

Construction of 35 villas at the Four Seasons Barbados may resume this quarter with new government-backed financing. The site of the project's 111-room hotel is in the background.

Call it a bailout, Caribbean style.

Barbados, a popular vacation spot for the affluent, is bailing out the troubled Four Seasons luxury-resort development on the tiny island. Construction of the project stalled a year ago as financing dried up and sales of its private villas slowed, after initially attracting a cast of celebrity buyers.

In a bid to salvage jobs, the government of Barbados agreed last month to guarantee a $60 million loan from a Caribbean bank to help restart construction. In return for the guarantee, the government ultimately will end up with a 20% equity stake in the project.

The down side: if the developer defaults, Barbadian taxpayers will get stuck with the loan.

While $60 million is small in comparison with the hundreds of billions of dollars spent on bailouts in the U.S., it is a big commitment for a nation whose government revenue totaled just $549 million last year. Like other Caribbean islands, Barbados, with a population of roughly 270,000, depends on tourism, which accounted for 15% of its gross domestic product last year and 64% of its total earnings.

Government loan guarantees for hotels are rare. But they might become more common in the Caribbean, given the recession's toll on the industry, which has hit hardest at the market's luxury end. In the first three quarters of 2009, developers canceled construction of 20 luxury hotels in the Caribbean, which would have added 4,000 rooms in the region, according to hospitality-research company Lodging Econometrics. By comparison, 23 luxury hotels with a total of 5,300 rooms were canceled in the U.S. over the same period.

In such a tough environment, hotel-industry analysts say, some tourism-dependent islands could choose to get more involved in various projects to help ensure their flow of well-heeled visitors in coming years. "It's going to take government subsidy and government intervention to jump-start many of these deals" in the Caribbean, says Scott Berman, a hospitality-industry consultant at PricewaterhouseCoopers LLP.

The Barbadian project is one of several hotels in the Four Seasons Hotels & Resorts chain that have run into trouble amid the current slump. The chain runs 83 hotels that carry its brand, but doesn't own any of them. It makes money by charging their owners management and branding fees.

In Dallas and San Francisco, Four Seasons hotels have gone delinquent on their mortgages, their owners have confirmed. Beanie Baby tycoon Ty Warner is negotiating with lenders to extend a mortgage on his New York Four Seasons and three other resorts because they weren't generating enough cash flow to automatically qualify for an extension, says a person familiar with the matter.

The Four Seasons chain, which the investment arm of Microsoft co-founder Bill Gates bought for $3.4 billion in 2007 in partnership with Saudi Prince Alwaleed bin Talal, is squabbling with some of its hotel owners over cost cutting, which it fears could cheapen its luxury image.

A particularly nasty dispute with the owners of the Four Seasons Resort Aviara in Carlsbad, Calif., is in arbitration, both sides have said.

A Four Seasons spokeswoman declined to comment on issues involving the owners of the chain's hotels, but added that the properties' operations continue as normal.

For Barbados, stepping in to backstop the Four Seasons loan was a final, dramatic solution. Two previous efforts by the resort's developers to land new financing, most recently from Maybach Group of Canada, had failed.

The new loan from Caribbean bank Ansa McAL Merchant Bank will go mostly toward paying off a previous $31.5 million loan from Bank of Scotland used to buy the resort's 32-acre site.

In a statement outlining the deal, Barbadian Prime Minister David Thompson said, "I am pleased to support an initiative where Barbadians pull together to put an iconic project back on track–one that will help shape the future of tourism in Barbados."

The Four Seasons Barbados is the brainchild of Mike Pemberton, a 68-year-old, U.K.-born developer who has lived in Barbados for three decades. Among the Caribbean properties he helped develop are Barbados's Glitter Bay Hotel and the Fairmont Royal Pavilion hotel, as well as a Ritz-Carlton in St. Thomas.

Mr. Pemberton began planning for the Four Seasons when Sandals Resorts International put Barbados's former Paradise Beach Hotel on the market in 2004. He assembled a group of European investors, arranged for the Bank of Scotland loan and bought the hotel and its surrounding land.

Mr. Pemberton's group then razed the hotel to make way for a 110-room Four Seasons and 35 private villas priced at $11 million to $18 million apiece.

Early on, the villas attracted big-name buyers, including "American Idol" judge Simon Cowell, composer Andrew Lloyd Webber and Formula One team owner Eddie Jordan. Inspired by Mr. Pemberton's home on the island, the models ranged from 10,000 to 20,000 square feet, and included private pools, indoor ponds stocked with koi or small sharks, floor-to-ceiling windows and hardwood floors.

Mr. Cowell's villa spans two plots and cost $32 million. His representatives didn't return calls seeking comment.

Mr. Pemberton, who initially planned to handle only sales and marketing for the project, had to step in as general contractor when no suitable contractor could be found on Barbados, he and others say.

By late 2008, his project was running into difficulties. Only 16 of the 35 villas had been sold. Buyers who had made deposits of 10% to 40% were slow to make additional payments. In January 2009, Mr. Pemberton's group stopped construction with the villas only partially completed and little more than groundwork done on the hotel.

Now that Barbados has stepped in with a loan guarantee, Mr. Pemberton and his investors expect construction of the development to resume this quarter. Once they find a new contractor, Mr. Pemberton's company, Cinnamon 88, will go back to handling the project's sales and marketing.

Mr. Pemberton's investors, led by British real-estate investor Robin Paterson, reckon they will need another $250 million in villa sales to finance the completion of the resort.

To do so, they must find another 19 buyers willing to pay eight-figure prices. "The government and we are confident about the continuation of villa sales," Mr. Paterson said.

That won't be easy in the current economy. Scott Smith, an analyst with hospitality-research company PKF Consulting Inc., predicts Caribbean villa sales will remain in a lull for several years until travelers rebuild enough wealth for such discretionary purchases.

"It's going to come back, but probably not until 2012 or 2013," he said.