They have clashed publicly in court. They have fought bitterly for months in closed-door negotiating sessions. But in the end, an international cast of creditors, owed $8.6 billion by Olympia & York Developments Ltd. (O&Y), may be forced to grudgingly accept that there is no quick fix for the financial woes of the bankrupt Toronto real estate company. Last week, that tone of resignation became apparent when O&Y filed a corporate restructuring plan in the Ontario Supreme Court. Despite their initial list of demands, the creditors, who consulted with the company as the proposal was developed, gained little new ground. The Reichmann family, which controls the private company, is still deeply involved in its management. The long-awaited plan also incorporates a traditional position by the Reichmanns and their advisers: it will take up to five years before North American real estate and natural-resources markets recover enough to enable O&Y to pay back more than 100 creditors around the world. Said Gerald Grunwald, president of O&Y: “This [restructured] company will be able to benefit from any future upturn in the Canadian real estate market.” The most recent submission to the court marked the second time that O&Y’s management has tried to win over its creditors with a complex attempt to reorganize the company. In April, creditors rejected a proposal that included many similar features: the extension of various levels of debt maturity by five years, the liquidation of non-core investments from the O&Y portfolio, and the issue of equity to lenders. The company presented a preliminary second plan in August but it was not put to a creditor vote. But what has become increasingly clear is that because of the enduring economic recession, O&Y’s creditors may have little choice but to accept the company’s latest offer. “This is not another typical downturn in the cycle,” said Harry Rannala, a veteran real estate analyst with McLean McCarthy Ltd. in Toronto. “We haven’t seen a real estate market like this one since the Depression.”
That gloomy perspective is echoed by financial-services analyst Steven Kressler of Midland Walwyn Inc. in Toronto. He said that the four major Canadian banks, which are among O&Y’s largest and most contentious creditors, will likely co-operate with the company’s proposed financial restructuring plan out of necessity. “Whether they like it or not, the banks know that liquidation of O&Y’s assets just won’t fly,” said Kressler. He added: “They may have reservations, but they’ll wait for their payback because they have to.” But Kressler also noted that since the banks have written down the loans to O&Y as non-performing, the pressure on them has also been reduced.
Among the many components of O&Y’s latest plan is a proposal to issue new bonds to its unsecured creditors, who are owed about $4 billion. Those bonds will not bear interest, but if the company is unable to redeem them after five years, they will be converted into a 90-percent equity stake in O&Y. O&Y is also proposing to form a joint venture with four Canadian banks, the Canadian Imperial Bank of Commerce, the Bank of Nova Scotia, the Royal Bank of Canada and the National Bank of Canada. Those banks would hold 80 per cent of the new entity and another new company, O&Y Properties, would hold 20 per cent. Among the assets held by O&Y Properties are First Canadian Place, the Exchange Tower and ScotiaPlaza, all in Toronto. To fund the joint venture, an outstanding O&Y loan of $131 million would be converted into capital and the banks would also extend a new $50-million credit line.
Despite the frequent complaints by creditors about the Reichmanns’ continued involvement in O&Y, the plan calls for the family to continue appointing one-third of the directors on the corporate board. Creditors and independent directors would fill the rest of the seats. The company hopes to win the approval of 34 separate classes of creditors by the end of November. But even if O&Y’s elaborate proposal wins approval, such severely depressed real estate markets could draw out the settlement process for many years to come.
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