DEIRDRE McMURDY April 27 1992



DEIRDRE McMURDY April 27 1992




For Robert (Steve) Miller and Gerald Greenwald, it was show time. Two weeks earlier, their new employer, Olympia & York Developments Ltd., the world’s largest privately held real estate company, had acknowledged for the first time that it could no longer meet the payments on all of its debts—estimated at as much as $23 billion. On this April morning, the company’s apparent disarray had been exposed again with the announcement that O&Y’s newly appointed president, Thomas Johnson, had quit almost before unpacking his attaché case after a dispute with the company’s reclusive owners, the Reichmann family. Now, it was Miller and Greenwald’s assignment to placate the 91 bankers from around the world who were filing into the ballroom of a downtown Toronto hotel.

It was a role that the two men—both Americans—had played before and know well. They had faced a similar task, on a smaller scale, as they struggled to pull Chrysler Corp. away from the brink of bankruptcy in 1979. With Chrysler’s return to financial health, Miller and Greenwald had secured reputations as masters of one of the most hazardous of executive assignments: the rescue of financially troubled companies or, if rescue proves impossible, their orderly breakup in whatever way would salvage as much of their value as possible for their creditors. They are now among an elite class of corporate troubleshooters whose specialty executives call “the workout.” It is a role, according to other practitioners, that requires as much luck and force of personality as it does skill with balance sheets. Last week, however, Miller and Greenwald played it to near perfection. They gave away little—either in terms of commitments or information. And they held O&Y’s creditors at bay—forestalling any immediate demands for repayment that

might have plunged the company into even deeper trouble.

In their three-hour private meeting with the Reichmanns’ lenders, the two executives dispelled the most extravagant assessments of O&Y’s debt, fixing it at $14.3 billion—as well as another $4 billion owed by its subsidiaries. And, brushing aside the fact that much of the

information contained in a 270-page package of documents presented to the bankers was a year out of date, Miller and Greenwald unveiled an audacious plan to restructure and reschedule the company’s massive loans— while borrowing still more money.

Then, as the bankers withdrew to consider their options, Miller and Greenwald took their offensive to the international crowd of reporters who jostled impatiently outside the meeting room. First, Miller, who heads O&Y’s team of outside financial advisers, introduced Greenwald as O&Y’s new president. Then, in an action

rare for the secretive company, Miller affably opened the floor to questions. Exhibiting a folksy confidence, he breezily described it as a “no-brainer” conclusion that the company’s creditors would agree to co-operate with its planned refinancing of its “plain vanilla debt.” Said Miller:“We did not expect signed agreements today—nobody brought their cheque-

book.” He added: “But we’re very satisfied with the outcome. We achieved our objective of providing information.”

The effectiveness of that soothing approach was evident the next day. The bellwether was the Toronto Stock Exchange, where the share prices of Canadian banks, which have been battered in recent weeks by investors’ alarm over their exposure to O&Y’s debt, strengthened. The Canadian Imperial Bank of Commerce, one of O&Y’s principal lenders, gained 75 cents a share, closing at $28.62 at week’s end.

But Miller and Greenwald will need deep reserves of confidence and credibility to succeed in the larger task of restructuring O&Y’s debt into a form that the company can afford to repay. Richard Wertheim, a partner in Wertheim Howe & Co. Inc., a Toronto-based communications firm, which has advised other troubled companies, including Campeau Corp. and Algoma Steel, said that they will have to strike a delicate balance to win co-operation from the Reichmanns’ creditors. “You have to reassure stakeholders at the same time as you communicate the gravity of the situation,” said Wertheim. “You must be candid without being terrifying.”

And however deft Miller and Greenwald are at administering corporate first aid, O&Y may yet require major surgery to survive. After initial expressions of relief at obtaining detailed financial statements from O&Y, many of its creditors began last week to publicly criticize

the company’s proposals. In particular, they objected to its plan to exclude its most secure real estate assets from negotiation, leaving only its troubled corporate investments and the floundering $7-billion Canary Wharf project in London on the table. Although Miller dismissed the creditors’ complaints as posturing on the part of banks that hoped to wring more concessions from the company, the testy exchange cast a cloud over the hard bargaining that lies ahead.

The task of reassuring creditors was further complicated last week by O&Y’s default on bond and mortgage payments totalling $1.4 billion. Concern escalated over the disclosure of a $2.3-billion syndicated loan that O&Y took on in

the early 1980s to help finance its diversification into resources. The setbacks drew a wry observation from Allen Karp, president and chief executive officer of the recently restructured Cineplex Odeon Corp.: “In these situations, you are fighting 100 fires with one hose, and there’s always another one breaking out.” Indeed, executives who steer a company through a financial restructuring have to juggle the competing demands of shareholders, creditors, suppliers and employees at the same time as they try to correct underlying problems and maintain operations. Because O&Y is privately owned by the Reichmann family, some analysts say that Miller and Greenwald may find it easier to negotiate a solution without having to accommodate diverse public shareholders. But Juri Koor, a veteran workout specialist, who wound up Standard Trust Ltd. of Toronto last year, disputes that assumption.

According to Koor, private companies are frequently more complex than widely held public corporations because their organization and structure do not need to be explained to outside investors. At the same time, they are not constrained by the requirements of quarterly financial reporting to public shareholders or by the disclosure requirements imposed on publicly traded companies. Said Koor: “With a private company, you just tailor it to suit the owner’s objectives and preferences.”

The personalities of private owners can pose as much of a challenge to a workout specialist as their labyrinthine corporate accounting. According to Koor, z individuals like the Reich| manns, who both own and K manage their own enterprise, I are often the most difficult people to work with in a restructuring because they resist relinquishing control of g the company they have nuro tured for so long. “These " guys tend to hover,” he said, “and it’s very hard for them to take advice.” In most cases, creditors consider it an advantage if the key executives in a workout are, like Miller and Greenwald, new on the scene. The outsiders can bring a fresh perspective to a company’s problems. In situations where the existing management is perceived as part of the problem, as with Robert Campeau’s stewardship of his now-dissolved retail and real estate company, Campeau Corp. of Toronto, a new cast is regarded as imperative. A rare exception was Frank Stronach, chairman of Magna International Inc. of Markham, Ont. When that company began to falter in 1990, Stronach convinced lenders to give him the chance to turn it around—and the company

returned to profitability last year. Said James Nicol, executive vice-president at Magna: “It may be more painful for an insider to do the job, but Stronach knew better than anyone where the excesses were, how they got there and how to cut them.”

One advantage that Miller and Greenwald have in their assignment at O&Y is that their working relationship has already been tested in the crucible of Chrysler’s brush with bankruptcy. Said Koor:

“It saves a lot of time if you don’t have to learn a new body language and you don’t have to second-guess someone. If the mutual trust and confidence are already there, you’re ahead of the game.”

Still, Cineplex Odeon’s Karp noted that even when good relationships exist going into the crisis, “you have to redefine and measure people by entirely different criteria.”

Whether the workout team is new or already in place, however, its members have to time their moves with great care. One senior executive who has been working on the restructuring of another Canadian company since 1989, and who spoke on condition of anonymity, said that it is critical to allow some time for the initial alarm over a corporate crisis to dissipate. “At first, there is always so much upset and anger that people have to vent,” he said, adding: “That’s not when the best decisions are made.”

But too slow a response can be just as unacceptable to impatient creditors.

For his part, Koor said that it should take no more than six months to bring about some major changes.

After a year has passed, he added,

“you become part of the problem and you understand too much.”

In O&Y’s case, the complexity of the company’s debts effectively guarantees that considerable time will pass before its problems are resolved. The Reichmanns’ unwillingness to seek public equity in their company, as well as their practice of borrowing money against specific real estate assets, forced O&Y to deal with more major creditors than many other companies in similar positions. With more than 100 international financial institutions to deal with, even calling a meeting of all their representatives became impossible. Instead, O&Y has organized its creditors into small groups that it hopes will negotiate a restructuring of its various debts based on the assets pledged as security on each loan.

Despite those efforts to ensure an orderly dialogue with creditors, Miller and Greenwald

will still have to contend with at least some rivalry for the first claim to any funds that O&Y raises by selling assets. Said Magna’s Nicol:

“Creditors are paranoid about letting anyone get ahead of them in the line. If one gets jumpy and demands money, the herd follows.” One way to counter that, he said, is for the company to threaten to seek protection in the courts, which would have the effect of stopping the negotiating process while a settlement is imposed on all parties. Another is to suggest a liquidation sale—a course that normally leads to assets being sold at knockdown prices, seldom returning as much as they would be worth under other circumstances.


• Keep the CEO under wraps initially— in case the story has to be reversed later.

• Be sympathetic with small shareholders, but offer no hope for their investment.

• Be candid: creditors must understand the gravity of the situation to become allies.

• Do not deal with all creditors at once. Have them form a committee with one or two designated representatives.

• Don’t dawdle: creditors who do not see results quickly soon lose patience.

• Keep a sense of humor.

Based on interviews with six of Canada’s leading corporate advisers.

Another target for the persuasive workout specialists is the company’s suppliers. In effect unsecured creditors, they have to be convinced to risk the possibility of delayed, or even cancelled, payments by continuing to supply the troubled corporation. Nichol said that suppliers who have long-standing relations with a company are often willing to grant them special considerations, especially during a recession.

O&Y has some advantages in the timing of its crisis, according to one workout spez cialist. According to that spe3 cialist, who insisted that his 1 name not be used, the lingered ing recession has led to more 5 widespread acceptance by I both creditors and suppliers of corporate restructurings, and even failures. “People have watched values dissipate across the board and their expectations have adjusted accordingly,” said the executive. “The admission of serious financial trouble is much more acceptable than it was five years ago.” Still, Greenwald emphasized last week the sheer scale of the task at O&Y. “There has never been one as big as this,” he told reporters.

Although some experts questioned the suitability of two former executives from the automotive industry for the assignment of saving a real estate company, veterans of the restructuring process say that it makes little difference. In fact, they insist that however extensive an executive’s experience is in a particular sector, there is no way to prepare for what lies ahead in any restructuring. Said Koor: “No matter how much homework you do, there are always surprises.”

But one point on which most analysts agree is the need to retain a sense of humor throughout the protracted and frequently painful process of salvaging, or selling off, an overindebted company. William (Bill) James, former chairman and chief executive officer of Falconbridge Ltd., has been trying to work with the creditors of Denison Mines Ltd. for more than a year. Said James: “The important thing is to try to have some fun with it and not get too frustrated. I’m not trying to earn $400 million a year over here, I’m trying to keep the doors open and the lights on.”

Over the next several months, however, as the Reichmanns and their new advisers work towards an agreement with their increasingly strident creditors, Miller and Greenwald may find that even their confident senses of humor become badly stretched.