The Development Bank of Jamaica (DBJ) doesn't expects to recoup more than US$2 million ($204 million) from the impending sale of the Ritz Carlton Hotel.
The high-end hotel is being disposed of under powers of sale by the senior lender, but the proceeds will be inadequate to meet the obligations of the junior lenders and equity investors, which included the DBJ, resulting in a loss on preferred equity and loans.
"It is not the result that we wanted or expected, but it is the very best that we could do under the circumstances," said DBJ managing director Milverton Reynolds.
The DBJ already took a $2.4-billion hit from impairment losses on the hotel last year. And when the impairment provision for Montepelier Citrus company was thrown in, nearly $3 billion was shaved off the bottom line of the company, which ended the year with a $2.4 billion loss.
"In the last financial year we took a hard look at our operations and loan portfolio and decided to make aggressive impairment provisions for certain long outstanding loans," said DBJ managing director Milverton Reynolds. "These provisions primarily relate to investments made in the late 1990s in the hotel sector and account for $2.4 billion; and our provision in Montpelier Citrus Company accounts for the balance."
Reynolds said that the initial investment in the hotel was made on account of the "great promise" it had for the development of Montego Bay and the expansion of Jamaica's tourism product.
"The economic benefits were expected to be great and in fact, for several years, the Ritz Carlton Rose Hall Hotel and Golf Course was the premier tourism facility in the west, attracting high-level foreign business groups and a higher than normal profile of clientele."
The Government had invested US$11.7 million, which consisted of equity (preference shares) and a loan, through the National Investment Bank of Jamaica (NIBJ) as part of a consortium which had provided a total of US$113 million for the construction of the hotel in 1999.
The Ritz Carlton Hotel began operating in 2002 as a high-end tourism property and recorded occupancy levels as high as 65 per cent in 2004 and posted net profits ranging from US$2.9 million in 2003 and US$6.8 million in 2008.
However, its revenues fell significantly between 2009 and 2012 and it recorded net losses of approximately US$7 million during this period.
"It employed well over 400 persons on a permanent basis and provided an income for construction workers, farmers and other groups of persons who were not directly employed there," said Reynolds. "However, a combination of factors - many of which are well known and include issues such as the worldwide economic meltdown and sluggish recovery since the mid-2000s to date -- have caused serious financial difficulties in the operation of the hotel."
Reynolds said that for the past few years, after taking on the investment when it merged with the NIBJ in 2006, the DBJ has become extremely cautious in considering any equity, quasi-equity or subordinated credit financing venture.
"We are also sensitising current and future investors on the Bank's dual role in ensuring economic development while, at the same time, safeguarding positive financial returns and sound management practices," he said. "This will assist in reducing the risks involved with taxpayer financing."
The DBJ said that its operations turned around a net profit of $327 million for the three months to June 30, 2013, and it currently has $23 billion in assets and a net worth of $7 billion.