Once touted as the world’s pre-eminent leisure community for the mega-rich, with billionaires from Bill Gates on down among its members, the Yellowstone Club near Big Sky, Montana, doesn’t have enough cash in the bank to buy propane, owner Edra Blixseth said in bankruptcy court in Missoula Wednesday.
The four companies that operate collectively as the Yellowstone Club filed for Chapter 11 bankruptcy protection in Montana on Monday, citing debts of about $360 million, most of it owed to a consortium of lenders led by international bank Credit Suisse. Chapter 11 allows a business to operate while it reorganizes its debt, and in this case the bankruptcy filing comes in the wake of an ugly divorce, allegations of large-scale financial impropriety, and a complete meltdown of the high-end real estate market and the credit markets that funded it.
The club doesn’t have enough cash to make its $600,000 monthly payroll for its 521 employees or to buy food for its restaurants, or for the electricity needed to operate the chairlifts at its storied private ski area. Last week, the club’s checking account had only about $40,000.
|See related story: News Analysis: Tim Blixseth Absent from Yellowstone Club Debacle – For Now|
That’s why U.S. Bankruptcy Court Judge Ralph B. Kirscher held Wednesday’s hearing on such short notice, so he might be able to OK an additional $4.4 million loan from Credit Suisse to allow the club to remain open for the next three weeks while the various creditors try and work out a long-term plan to save the club. The club has 360 members, and just a few years ago famously touted that not just anyone could buy in; you had to prove your net worth was in the millions, and commit to building an expensive home on the expensive lot you bought along with the membership. Now, though, it’s safe to say that people are not exactly lining up for the 500 memberships that remain.
In all, the club has taken in $88 million in membership initiation fees and about $5 million annually in dues, as well as $370 million in loans from international banker Credit Suisse. Yet the lodge and other infrastructure remain unfinished.
“Where did all the money go?” asked an attorney for club members.
That question had no answer, but other gambits were on display. The courtroom discussion about the bridge loan from Credit Suisse exposed the intense squeeze play as the various creditors vied for financial leverage.
At stake is who will emerge as the owner of the club after the dust settles, and at what price. There aren’t a lot of interested buyers in the current market, and as Edra Blixseth said, she’s only bothered talking to financial groups who already have “skin in the game.”
Those players include Credit Suisse, the club’s long-time lender, which is owed about $307 million, and CrossHarbor Capital Partners, a Boston-based hedge fund led by investor and club member Sam Byrne. CrossHarbor negotiated for more than a year to buy the club before the current crisis hit, and apparently saw an opening in the wake of the divorce of Tim and Edra Blixseth. According to testimony Wednesday, CrossHarbor loaned some $35 million to Edra to help her buy out ex-husband and founder Tim Blixseth.
CrossHarbor had offered a loan of $18 million to keep the club open until February 13, at which point — in the peak of the ski season — it would presumably have to be sold.
Edra testified that she had originally favored the CrossHarbor plan, but had a change of heart when Credit Suisse indicated it would fight tooth-and-nail against another entity gaining a priority lien on the club’s assets. She now supports the Credit Suisse plan, in which fees and interest account for as much as one quarter of the $4.4 million loan.
Edra gained control over the operation of the club in August, and vowed to get its overdue construction back on track and to keep its business out of the public eye.
Edra and the Yellowstone Club tried to take a step in that direction in September by entering a long-term contract with Discovery Land Co. of Scottsdale, Arizona. The company, which operates 15 other private communities around the world, took over the management of the club and planned to expand the residential community, infrastructure and amenities.
But the club’s finances were worse than she thought, she testified. Vendors hadn’t been paid. Staff morale was terrible. Employees were even using personal credit cards to pay Yellowstone Club expenses. Edra poured $16 million of her own money into the club, but she won’t dig any deeper, she said.
All Edra and Discovery Land Co. could do was postpone the financial train wreck by a matter of weeks. Credit Suisse’s attorney alleged that Edra, Discovery, and CrossHarbor had actually been working in league to come up with a plan that would enable CrossHarbor to gain control while potentially leaving Credit Suisse out in the cold.
All the parties want the exclusive Bozeman-area club to remain open — because if it closes, it’s simply a collection of over-priced second homes. But investors and lenders often play a game of chicken in this type of situation, using the threat of closure to vie for position.
But it was a game that had no resolution on Wednesday, because nobody had given Judge Kirscher a final draft of the proposed order, and he wasn’t about to put his signature to a work-in-progress. The hearing will continue on Thursday, which under the judge’s calendar will allow the parties only 12 days to come up with a plan for when the Credit Suisse deal runs out, if it’s even OK’d.
Then, unless some other plan materializes, the richest club in the West will be broke again.