The Reichmanns Start DealingJohn Meehan
Canary Wharf, the massive office development in London's dilapidated docklands, has been a huge gamble ever since it was a glint in the eyes of Paul Reichmann, the Toronto mogul with the world's largest private real estate empire. He believed the project would assure London's preeminence as a financial capital.
Like his other landmarks, including New York City's World Financial Center and Toronto's First Canadian Place, Canary Wharf was more than a building complex, it was a vision. But it quickly became a financial sinkhole, draining strength from his sprawling empire, Olympia & York Developments Ltd.
O&Y picked a bad time to invest $3 billion in the 71-acre development: Vacancy rates are still as high as 40%, and attempts to attract tenants are at a standstill as London suffers its worst property slump in 45 years. Meanwhile, lending has dried up just as O&Y was preparing to seek financing.
The turmoil at O&Y is the clearest evidence so far of the depth of the worldwide real estate slump. By now, markets are used to seeing real estate tycoons in trouble. As the 1980s wound down and the likes of Donald Trump, Peter Kalikow, and Trammell Crow took sudden tumbles, the markets bent, but didn't break. But the Reichmanns dwarf every other player in the real estate game, and the crisis at O&Y caught the attention of central bankers in London, Ottawa, and Washington.
CULTURE SHOCK. Now, the Reichmanns are on unfamiliar ground with their bankers. Instead of relying mainly on their reputation as shrewd investors, they must reveal what is for them an unprecedented amount of financial data. As a result, the Old World culture at O&Y that rested on handshakes and Paul Reichmann's word of honor will be profoundly changed.
Going into the restructuring talks, the Reichmanns are betting that Canary Wharf can save them. A prominent banker familiar with the negotiations has told BUSINESS WEEK that the Reichmanns hope to use the London office complex as their main bargaining chip. Specifically, O&Y hopes to persuade its scores of bankers to accept equity in Canary Wharf or use it as collateral. In return, the banks would cough up new loans to help the Reichmanns meet their obligations and finish Canary Wharf, which is only one-third done.
It's the opening gambit in what could emerge as the biggest corporate debt restructuring in history. The Reichmanns are eager to soothe anxious bankers from Toronto to Tokyo who have lent O&Y upwards of $15 billion. And that doesn't include millions of dollars worth of other obligations, such as currency and interest rate swaps. One banker describes O&Y's swap portfolio as "sizable."
No one knows whether O&Y's creditors, including the Royal Bank of Canada, Citibank, and Barclays, will buy in to the Reichmann solution. But they may have little choice. Canary Wharf is the Reichmanns' biggest asset bearing the least debt. Moreover, if bankers foreclosed on O&Y, they would probably end up owning the project anyway. It may come down to a question of who finishes Canary Wharf, the Reichmanns or the bankers.
Troubles have dogged O&Y for the past two years. With property values falling and vacancy rates soaring in all its major markets, O&Y's once formidable income from leases has sagged. As a result, O&Y's commercial paper on Feb. 14 was downgraded, despite carrying bank guarantees. That made it harder and harder for the company to roll over short-term obligations (table). On Mar. 6, O&Y retired roughly half its $800 million in outstanding commercial paper.
PANIC FIGHTERS. At roughly the same time, O&Y executives began to meet privately with officials at the Bank of Canada and Bank of England. The central bankers were said to have expressed concern about a potential panic in world markets if O&Y couldn't raise enough cash to service its debt. Within a week, the company began notifying banks that they would need debt relief. Most weren't surprised. "As soon as they had problems with their commercial paper, we began scrambling," says a banker.
To soothe its lenders, O&Y is doing the unthinkable: In mid-March it started opening its balance sheet to scrutiny. Until now, the Reichmanns have been remarkably successful at keeping their company under wraps in spite of its girth. It includes $20 billion worth of real estate as well as $2.8 billion in other investments. "It was clear that there was a need to share more information with the banks than the Reichmanns had in the past," says a banker.
To further enhance the company's credibility, O&Y has put together a formidable team to work out a strategy with the banks. On Mar. 24, O&Y named former Manufacturers Hanover President Thomas S. Johnson as president. Johnson, who left Manny Hanny before it merged with Chemical Banking Corp., is the first person who isn't a member of the Reichmann family to hold the position. His mere presence signals a sea change in O&Y's style of doing business.
Despite the unprecedented disclosure, one banker says the Reichmanns want to avoid renegotiating terms on most of O&Y's existing loans. The majority of the outstanding credits are well-collateralized, O&Y insists.
That leaves a giant question mark over Canary Wharf, which could eventually cost $6 billion. Few bankers are eager to force the Reichmanns into bankruptcy with stringent demands. The Royal Bank of Canada and Canadian Imperial Bank of Commerce, which is leading the negotiations with the Reichmanns, are each said to have up to $800 million of O&Y loans. Citicorp, O&Y's biggest lender outside Canada, has a nearly $500 million exposure.
For these and other banks, buying into the Reichmanns' dreams for Canary Wharf is risky. The most recent test of Canary Wharf's appeal to investors proved catastrophic. In early March, a British court ruled that O&Y had to buy back Morgan Stanley & Co.'s office tower at Canary Wharf for $240 million. O&Y had been counting on Morgan to arrange outside financing for the transaction. Morgan's try collapsed when a Japanese pension fund pulled out. The Reichmanns also had planned to raise $370 million by selling one of the buildings to individual investors in the form of a tax-free trust. O&Y canceled the scheme when Britain lopped off the tax breaks in its 1992 budget proposal.
With so many uncertainties surrounding Canary Wharf, bankers may not be eager to sign on to O&Y's plan. Most of O&Y's creditors are still just beginning to understand the company's overall balance sheet. Still, bankers don't have a lot of time. With an empire this size, the stakes are much higher than O&Y's future. Many of the world's bankers are counting on a speedy resolution.
HOW TIME RAN OUT FOR O&Y JAN. 16 Rift between O&Y and Morgan Stanley hits the papers. A few days later, Paul Reichmann admits publicly that "cash flow is much worse than it was two years ago" FEB. 14 Some O&Y commercial paper and other debt downgraded MAR. 6 The Reichmanns retire roughly half of the $800 million worth of O&Y's paper MAR. 18 O&Y cancels public financing plan for Canary Wharf after British government nixes tax breaks MAR. 19 The Reichmanns say they'll redeem the remainder of O&Y paper and agree to sell Exchange Tower, a Toronto office building, for $250 million MAR. 22 O&Y announces plan to restructure its enormous debt, which totals more than $15 billion in loans from 100 banks MAR. 24 Thomas Johnson, former president of Manufacturers Hanover, is named O&Y's president. Chairman Paul Reichmann will devote himself entirely to Canary Wharf DATA: BW