South Korean institutional investors that backed the stalled Drew Las Vegas construction project plan to file lawsuits against brokerages Mirae Asset Daewoo and NH Investment & Securities, which underwrote mezzanine loans on the deal.
Around 15 domestic investors have started the process of hiring legal advisors over their highly probable losses, industry sources said on Tuesday (February 23).
One of the key issues in the potential legal action will be financial due diligence, with the institutional investors casting doubts on whether the underwriters have properly verified the equity investment.
Korean institutions Witkoff ($98.5 million) and Marriott ($75 million), and a Chinese investor ($175 million) made combined equity investments of $348.5 million in the project and the focus is on whether the Chinese investor’s funds actually existed.
The plan to build a 68-story, five-star hotel with 3,780 guest rooms and a casino has faced concerns since it was halted last March amid the Covid-19 pandemic. Its developer Witkoff Group virtually defaulted on a $2 billion project loan last May and senior lender JP Morgan decided to sell the security interest on its loans to a third party. Koch Real Estate Investments recently said it would buy the stalled development project through a “deed in lieu of foreclosure”.
Institutional investors have raised suspicions over the fact that the equity investment had been spent so quickly. “In the case of this project, the annual expenditure is around $100 million, so the equity investments are more than enough to use for three years,” said an institutional investor, adding, “It is difficult to understand that the project has defaulted around one year after the investment had been made.
“We thought that it was necessary to check whether the equity investment had actually existed as it was written in the ledger,” said the source, adding, “We plan to check whether the underwriters performed financial due diligence properly.”
Market insiders said there are reasonable doubts over the financial due diligence. “During the due diligence process on this project it was strange that the amount of equity investment was too small and I mentioned it, but there was no response from equity investors,” said an industry source, adding, “I decided to drop the deal because I thought the investment structure was poor.”
An official at one of the underwriters said: “We are checking all issues related to the project with senior lender JP Morgan.”
Korean institutions invested a total of $250 million in the project, in senior mezzanine and junior mezzanine loans. Some of these were sold down to individual investors through Shinhan Financial Investment as a form of derivative linked securities. (Reporting by Byung-yoon Kim)