Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/040692/0406202.000

Text File | 1992-10-19 | 5KB | 114 lines

                                                                                BUSINESS, Page 50

REAL ESTATE

The $20 Billion Question


Can Canada's cash-starved Reichmann family pull off the biggest
private debt restructuring in history?

By BARBARA RUDOLPH -- With reporting by Helen Gibson/London and
Courtney Tower/Ottawa


    For months, rumors swirled through financial and real
estate markets that the Reichmanns, Canada's multibillionaire
developers, were desperately short of one essential commodity
-- cash. Brothers Paul and Albert responded, characteristically,
with silence. Last week, though, they were forced to talk. In
a brief communique, they admitted that their global real estate
holding company, Olympia & York, was suffering a "liquidity
crisis." As a result, the company would meet with its bankers
to restructure debts totaling an estimated $20 billion.

    Less than two days after that announcement, the Toronto
headquarters of Olympia & York lobbed another bombshell by
reporting a shake-up of the firm's management. To help confront
its bankers, O&Y named a new president to replace Paul
Reichmann: Thomas Johnson, 51, the former president of
Manufacturers Hanover Trust. As financial advisers, the
Reichmanns signed up some well-respected Wall Street names:
investment banker James Wolfensohn and Robert S. ("Steve")
Miller, who helped engineer the Chrysler bailout 12 years ago.
Still, O&Y spokesman Peter Rosenthal stressed that "Paul and
Albert remain the primary stockholders and the top executive
leadership of the company."

    As the Reichmanns and their bankers prepared for their
complicated pas de deux around the negotiating table, the stakes
could not be higher: the world's biggest property developer was
about to embark on the largest private debt restructuring in
history. Banks in Canada are said to hold an estimated $2.4
billion in O&Y debt, much of it on the books of Canadian
Imperial Bank of Commerce and the Royal Bank of Canada.

    Citicorp leads the crowd of American lenders. The
investment firm of Keefe, Bruyette & Woods estimates Citicorp's
exposure to debt at $500 million. With a total of $11 billion
in American commercial real estate loans on the bank's books,
the U.S "impact is significant," says Keefe, Bruyette president
James McDermott. "The Olympia & York news is a wake-up call that
commercial real estate remains public enemy No. 1 for U.S.
banks, especially Citicorp."

    Olympia & York is feeling the sting of sharply reduced
real estate values, which are down by as much as 50% in some
Manhattan and Toronto locations. But the most serious problem
facing the family enterprise is London's $6.9 billion Canary
Wharf project. A 71-acre office complex in the out-of-the-way
Docklands area, it is the largest commercial property
development in Europe. London faces a glut of 40 million sq. ft.
of unused commercial space, though, and 40% of Canary Wharf
remains vacant. Even that figure is deceptive, because many of
Canary Wharf's tenants only signed on when O&Y offered to buy
out their existing leases and pay their relocation costs.

    Cash at O&Y was probably becoming scarce as far back as
September 1990, when the Reichmanns announced they were trying
to sell a 20% stake in their U.S. real estate portfolio. No deal
was ever struck, suggesting that things would probably get
worse before they got better. Last month fears of a cash crunch
were confirmed when the value of some commercial paper and
bonds backed by O&Y were suddenly downgraded by Toronto's
Dominion Bond Rating Service. To calm edgy investors, O&Y said
it would pay off a short-term bond within 10 days.

    But that did not stave off the restructuring that followed
soon after. The announcement of debt negotiations sparked an
immediate response from Ottawa. Government representatives and
the Bank of Canada quickly arranged talks with O&Y and its
lenders last week. The aim, said Finance Minister Don
Mazankowski, was "to stabilize the situation." Ottawa could help
O&Y dispose of its assets, which will probably include some
Toronto office towers, but Mazankowski insists that no
government "bailout" is in the offing.

    Once the restructuring takes shape, the banks will
probably trade some debt for equity positions in O&Y properties.
Debt-repayment schedules will likely be extended as well. The
negotiations cast serious doubts on the firm's promise to the
British government to contribute some $690 million to help
finance a subway connection to Canary Wharf. The link could
prove crucial to the ultimate success of the development, but
the banks may well balk at spending scarce cash.

    The Reichmanns contend they will stay the course. Paul
Reichmann reaffirmed his faith in Canary Wharf last week,
declaring that his company is "confident that the development
will be a success." Such is their reputation for intelligent
long-term investment that many experts still give them
respectable odds. Says John Robbins, a partner at Kenneth
Leventhal & Co., an accounting firm that specializes in real
estate: "If anyone is going to make it, the Reichmanns are.
These guys did not come into town on a load of wood. They're
smart." Considering the load of problems they are lumbered with,
however, they will also need to be a little lucky.