Real Estate The $20 Billion Question

By Barbara Rudolph

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.

With reporting by Helen Gibson/London and Courtney Tower/Ottawa