January 22, 2009

Vancouver Olympics and Fortress Investment Group

Vancouver is currently preparing for the 2010 Winter Olympics. As part of the Olympics Vancouver is constructing a residences for athletes. The city had planned to see the residence sold off as condos after the Olympics for a healthy profit. With the credit crunch and the downturn in housing in Vancouver though the story is changing. To boil it down, basically Fortress Investment Group was loaning the money to complete the work on the site and has now stepped back and stopped funding the project, leaving the city of Vancouver in the lurch.
Wherever there is money it is worthwhile to ask; is there a opportunity here for investors?

Lets examine this further. Why would Fortress back away from the current deal, is it a ploy to refinance a better deal with the city and therein create an interesting buy opportunity on its stock?

What possible reasons would Fortress back out:
  • Unhappy with the interest payment? Unlikely, the deal had a strike price set before the interest rates really began unwinding so they are receiving fair dollar value- rumors are that it was somewhere in the neighborhood of 8%.

  • Better Opportunities for Fortress to spend on? Unlikely,with the current economic condition there does not appear to be high number of viable options available.

  • Belief that the construction will not finish? Impossible, the City of Vancouver signed a deal promising to see the project through to completion.

  • Fortress does not have the capital and is using a loophole to escape. Now we are getting somewhere.
The last year has been tough on Fortress, it has posted massive losses over the last two quarters and its stock price (which in this case can be thought of as a thermometer of investor sentiment) is under $2 after having traded as high as $30 a year ago, it has also faced several recent downgrades. It is highly unlikely that Fortress is finding it easy to come up with the millions of dollars in funding to finance the rest of the construction.

Is there a buy opportunity here, unlikely. I see the likely results of this being any of the following:
  • The city/province will finance the project to its completion.
  • The city will sell the site at a deep discount to another developer with the promise that they will complete the site on time.
  • The city will find one of the few fiance companies left out there to carry the project through to completion.
All in all I don't see much of a future for Fortress in this situation, and therein no real buy opportunity.