WEAK LINKS IN A CHAIN
TWO FORMER STARS STRUGGLE ON
Royal Trust, a venerable company that manages the financial affairs of thousands of elderly Canadians, has endured three extremely difficult years. But the effects of that stressful period were never more apparent than when Royal’s departing president, Michael Comelissen, appeared before an employees’ annual meeting in Toronto three weeks ago with a pair of foam breasts strapped to his chest. He called them a “royal bust”—apparently a reference to the title of a critical magazine story that had just been published. Comelissen went on to deliver a rambling talk liberally embellished with obscenities. At one point, he called Pacific First Financial Corp., a U.S.-based savings and loan subsidiary that Royal Trust was trying to sell, “a piece of shit.” His performance infuriated many employees. Said one of them, who wished
to remain anonymous: “He seems to think that in order to establish some sort of bond with an increasingly disbelieving staff he needs to sink to the lowest common denominator, rather than provide leadership.” Although Comelissen eventually apologized for his behavior, his earlier action was unwelcome in the group of companies clustered under Peter and Edward Bronfman’s holding company, Edper Enterprises Ltd.
The Edper group is growing increasingly vulnerable to the uncertain economic environment and nervous financial markets. Its most apparent financial problems lie with Royal Trustco Ltd. and Bramalea Ltd., a Toronto real estate developer that is currently negotiating a restructuring plan with its lenders in an attempt to head off insolvency. On Nov. 6, a flicker of fear about the group swept through
the stock market and drove down the price of shares of many companies in the group, in part because of concerns about Royal Trustco and the just-announced deal to sell Pacific First. “Obviously, there is a paranoia and a cynicism out there about the entire Edper group,” said one financial analyst who, like the others, asked not to be identified because of concerns for his future relationship with the company. “Any sort of fire in any part of the empire tends to be analysed and blown up. A few days ago it was Royal Trust. When Bramalea finally goes to court, people will shift their sights over there.”
Paradoxically, the problems at Royal Trust, which had been escalating for three years, might actually be clearing up now. But analysts and investors, burned before, have lost faith in the company’s assurances. Patrick McKeough, who writes The Investment Reporter, a weekly stock market newsletter, exemplifies the wariness. After Royal Tmst set aside reserves for possible loan losses against its European operations in 1990, McKeough noted that the company “had written off everything it is likely to have to write off in the foreseeable future.” He recommended buying the stock, then trading at about $9 a share. “It turns out that I was wrong about that,” he said last week.
'Disappointment’: Royal Trust shares are now trading for about $2.98 each, and McKeough’s latest newsletter called the situation a “Royal disappointment.” He now advises against new buying, even though he says that he believes that most of the damage has been done. “We never thought that Royal Trustco
was going to come up with as many problems as it did,” said McKeough. “By the time you can put your finger on the reason for being worried, usually it is too late. And if there is something funny going on that we don’t know about, it probably will not be confined to just one part of the empire.”
The first public sign of trouble at Royal Trust arose in 1990 at the company’s European operations. It reported a loss of $65 million that year, compared with a profit of $265 million in 1989. At the same time, many of Royal Trust’s main Canadian competitors, including the big banks and Canada Trust, were reporting record profits. Royal Trust blamed the losses on bad loans made to small commercial businesses in Britain. As a result of the European lending problems, which indicated a lack of management control, Comelissen offered his resignation to the trust company’s board, which included several senior representatives from other Edper holding companies. The resignation was not accepted.
The next major blow to Royal Trust was levelled at its newly acquired U.S. subsidiary. In 1988, Cornelissen announced plans for a big push into the United States. “If I want to keep my job,” Cornelissen said at the time, “in the next two or three years we will have established ourselves in the U.S. in some way.” The next year, Royal Trust bought Pacific First, which was operating in the states of Washington and Oregon.
Royal Trust paid $254 million for the company and later injected another $575 million to enable it to acquire other smaller financial companies in the Pacific Northwest and to enlarge its capital base.
California: Jay Tejera, a Seattlebased banking analyst who has followed Pacific First, says that Royal Trustco’s expansion strategy was good, but its execution was poor. Tejera, who at the time of the acquisition said that Royal Trust paid too much, adds that the decision to enter the Pacific Northwest region was sound.
Even now the real estate sector in the region is stable and banks and savings and loan companies are reporting record profits with retumon-equity levels as high as 20 per cent. But in 1990, just before the recession began, Pacific First had moved beyond its Washington and Oregon home base to launch an aggressive lending program in the southern California real estate market. That market soon began to decline and many of those loans turned sour. Still, said Tejera, “Pacific First is not in trouble. It is profitable, it’s just not as profitable as it should be.”
But Royal Trustco, under pressure to strengthen its financial statements, decided to retreat from the market. On Oct. 27, it announced the terms of a complicated transaction that resulted in a net loss on Pacific First of $70
million. In addition, it has taken back a pool of Pacific First loans, one-third of which are classified as nonperforming. And it has agreed to buy, under some circumstances, as much as $180 million of preferred shares in Washington Mutual Savings Bank, the Seattle company that is buying Pacific First. Royal Trust chairman Hartland MacDougall says that the company expects to make significant recoveries on the loans it has taken back from Pacific First. “We think the net value is advantageous to us to keep,” he said. However, said MacDougall, most important to the company’s well being is the underlying strength of its core trust busi-
ness in Canada, which has come through the recession unscathed.
Royal Trustco will sell the Pacific First loans as quickly as possible, he added, and use the revenue to strengthen the company’s capital base. As a result of the sale and $150 million in special reserves set aside against possible failed loans, Royal Trustco reported a loss of $227 million for the first nine months of the year. To further improve its finances, the company announced that it will cut its dividend, for the second time in a year, from 10 cents to five cents, and that it intends to raise $200 million by selling more equity.
Financial analysts support attempts to improve the balance sheet. But some say that they are concerned about the risk from the Pacific First loans that Royal Trustco has
retained, and they are wary about the company’s future. Dominion Bond Rating Service Ltd., of Toronto, which cut Royal Trustco’s credit rating to below-investment-grade levels in mid-August, said that by keeping the nonperforming commercial loans, the firm has failed to reduce its comparatively high ratio of nonperforming loans to its common equity. “Overall, the critical factor for Trustco remains the uncertain outlook for North American and British economies,” said a Dominion report. “Earnings recovery is still expected to be a long slow process for Trustco.” Bank analyst Steve Kressler says that his confidence in Royal Trustco was completely exhausted by the terms of the Pacific First sale: “When you are faced with the third ‘onetime’ write-off, it is very difficult to have a lot of confidence that there won’t be a fourth, or fifth.” Commitment: Those financial difficulties have shaken company morale and contributed to a loss of respect for management. Cornelissen was a demanding executive, but employees clearly respected his commitment. Like Edper leader Jack Cockwell, he came to Canada from South Africa and worked as an accountant with Touche Ross in Montreal. He successfully ran the Edper real estate holding company, Trizec Corp. Ltd., for seven years, then went to work for Royal Trust in 1983.
Recently, Cornelissen has been under both business and personal pressures. He went through a divorce from his wife, Trina, beginning about the same time as Royal Trustco’s problems erupted. A request for an interview with Cornelissen was declined, but MacDougall and Comelissen’s successor, James Miller, did g agree to speak to Maclean’s. MacDougall attributes Comelissen’s be§ havior at the Toronto employees’ I meeting to those pressures. “It is z unfortunate,” MacDougall said, “and i any part that I’ve known about has “ been fully apologized for and he feels very badly about the words.” But oth-
ers say that Comelissen’s actions
were not totally out of character with the way he behaved privately in the past. “He is a crude person,” said one employee, who again asked to remain anonymous. “His humor is lockerroom humor. I was often embarrassed when he told a joke.” Until recently, Comelissen’s only other obvious public deviation from the buttoned-down banker’s image was the name of his sailboat: Psychopath.
In September, Cornelissen announced that he would step down, and in October, Miller, a chartered accountant and senior partner with Deloitte & Touche, was named as his successor. Miller will take over the job on Jan. 1; he is already taking part in Royal Trustco’s annual budget and planning process. A company spokesman says that Cornelissen will begin a sabbatical in January. He will eventually move
to Vancouver, act as Royal Trustco’s Pacific Rim representative and remain on the board.
Miller, in an interview with Maclean ’s last week in the company’s stark black office tower in downtown Toronto, said that, in addition to improving morale, he hopes to strengthen the company’s financial position and to regain a high-quality credit rating. Gesturing at the luxurious furnishings on the executive floor—plush butter-yellow carpeting, a circular wood staircase and original art—he indicated that he disapproved of the opulence. He seems intent on cutting costs in other ways, as well. “There’s fat in every organization that I have seen,” said Miller, adding that he has not come to any conclusions yet about what can be cut at Royal Trustco. However, commenting on a sophisticated new computer system that the company had recently introduced, he said: “Theoretically, every time you make a $10,000 investment on technology you should have replaced one employee.”
Layoffs would make morale-building more difficult, particularly because there is a perception that management is not addressing the firm’s root problems. Miller says that the toughest issue that employees have faced him with since his appointment is how he will deal with Royal Trustco’s largest shareholder, the Edper group, which owns 48 per cent of the company. Said Miller: “I told them, ‘I am 61 years old, I have had a successful career. I am not going to compromise on what I believe is right.’ ” Employees and analysts alike express optimism that Miller will improve the situation.
Problems: But some employees also seem concerned that some of the executives who created the problems still hold key positions at the company, including Comelissen. “They claim it wasn’t mismanagement that caused this, it was the market that created this,” said one employee who strongly disagrees with that view. “What other company in this country would allow the man responsible for ruining the company to remain on the payroll and on the board? He should go away.
Where is the voice of the other 50 percent of the shareholders?”
Meanwhile, Bramalea is experiencing somewhat similar problems related to declining real estate prices, although its condition is even more severe. Analysts criticize Edper executives in the holding companies that oversee Bramalea’s operations for not supplying management discipline. Bramalea, a Toronto-based real estate company, owns 37 million square feet of leasable space in shopping centres, office and industrial properties and residential condominiums, mainly in Canada and California. The Edper group owns 72
per cent of it through its real estate holding company Trizec Corp. Ltd., which bought into Bramalea after the last recession in the early 1980s.
In the heady days of the real estate boom, Bramalea managers had good cause for optimism: the company had been so integral to the
CIRONOLOSY OF A CORPORATE CRISiS
Canadian Bond Rating Service Ltd. cut its rating on commercial paper and senior debentures issued by Bramalea Ltd.
Dominion Bond Rating Service Ltd. slashes its rating on Bramalea debt by four grades, one of the steepest cuts ever made by the credit monitor.
Bramalea becomes the first Edper company to halt dividend payments.
Bramalea misses a $5-million interest payment on an issue of $100 million in senior debentures.
Bramalea sells assets to pay down its debt. Asset sales from Oct. 31/91 represent $335 million.
The company announces a tentative deal with five bank creditors, which hold almost 40 per cent of its debt.
Bramalea posts a nine-month loss of $34 million.
Debenture holders and major Canadian and European financial institutions meet in Toronto. The committee of debenture holders is demanding more concessions from Bramalea’s secured lenders, including its major banks.
more than two decades of steady growth that an entire suburb outside Toronto is named for it. And they were gearing up for even bigger things. When recession ripped through the real estate market, Bramalea was left with significant undeveloped land holdings around Toronto and in California. Bramalea’s president and chief executive, Marvin Marshall, told the company’s annual meeting two years ago: “The problem was that Bramalea moved too aggres-
sively in buying sites in the Toronto area. It got swept up in the boom euphoria and was among those caught by the unexpected timing of the market downturn.” The company had already taken a writedown on its land purchases and was soon moving to sell off a large portion of its assets, at depressed prices, to get the cash to meet its interest costs.
But real estate prices continued to fall, particularly on commercial properties. And in May, when Olympia & York Developments Ltd. was forced into bankruptcy protection, the stock market singled out Bramalea as the next most likely company to fail. By the time of O&Y’s announcement, Bramalea’s stock price had plunged to $4.30 from a high of $23.63 in 1989. Over the course of the next five months, as the possibility of a Bramalea bankruptcy increased, the stock continued to fall until it closed at 45 cents last Friday. Meanwhile, the company continued to sell property: last month, for one, it auctioned off 28 luxury condominiums in Toronto. It set reserve prices at $135,000—$450,000 less than the price for which the units were offered in January, 1991.
‘Breakthrough’: Bramalea executives are now negotiating with its lenders—the banks, other financial institutions and debenture holders— and they will meet them in Toronto on Nov. 19. “It is hard to know what will happen,” said Lorie Waisberg, a business lawyer representing the debenture holders, who have about $500 million of the company’s debt. “It just takes one breakthrough to finish the thing, but you never know when that will come.” Real estate analysts say that it is in all the parties’ interests to reach an agreement, rather than push the company into insolvency. Waisberg agreed, but added: “Everyone is acting in their own best interests and everyone has a different view of the value of the assets.”
Even if it were to be pushed into bankruptcy, analysts say, the effect on other Edper companies—and even on the broader real estate market—is likely to be manageable. As in the case of O&Y, lenders would be reluctant to dump a lot of Bramalea’s real estate on the market at one time for fear of driving prices downward. And Edper has been raising capital and shoring up its finances to protect against any extra stresses. Said one real estate analyst, who asked to remain anonymous: “Trizec has taken steps to provide for it, and it would be able to cope. But it does reflect poorly on the controls and management of that group in recent years.” And long after the current recession passes into history, it may be those management failings that are remembered.