DEIRDRE McMURDY April 6 1992



DEIRDRE McMURDY April 6 1992




Just after one o’clock each weekday afternoon, an Orthodox rabbi convenes a prayer meeting at the headquarters of the world’s most powerful real estate developers. The strict daily observance is just one of the factors that have contributed to the stature of the three Reichmann brothers—Albert, Paul and Ralph. In a business fraught with fast talk, flamboyant displays of wealth and sometimes fleeting fortunes, the three men have been widely revered as austere, wise and trustworthy. Last week, however, that image was shaken as reports exploded in major Western capitals that the secretive family business is tottering under the weight of an estimated $23-billion debt. By week’s end, the Reichmanns had relinquished sole direction of Olympia & York Developments Ltd. (O&Y), the private holding company at the centre of their Toronto-based empire, and were close to becoming tenants in one of their own buildings. The setback stunned many financial experts—although it confirmed the more skeptical judgment of some others. Said Ira Gluskin, a veteran Toronto investment counsellor and former real estate analyst: “The myth of the Reichmanns is the greatest one of our time. The only surprise is how long people have bought it.” Added Gluskin of his fellow analysts: “They really want to believe the Reichmanns talk to God.”

The Reichmanns’ creditors swiftly asserted

their very secular influence over debtstretched Olympia & York. A group of banks led by the Canadian Imperial Bank of Commerce, which has lent the Reichmanns an estimated $700 million, initially arranged a temporary loan of about $400 million to meet the company’s immediate cash needs. Then, bankers and other lenders formed a committee to oversee the restructuring of O&Y’s enormous borrowings—an amount equivalent to the entire national debt of Chile. Alerted to O&Y’s situation by the bankers, federal Finance Minister Donald Mazankowski said that the government was prepared to help the Reichmanns “stabilize” their finances.

Outsider: In midweek, Paul Reichmann himself stepped aside as president of the company that the brothers founded in 1965, making way for an outsider, former New York City banking executive Thomas Johnson, to assume control of O&Y’s finances (page 36). Johnson acted quickly, meeting with representatives of 20 major Reichmann creditors—including Allan Taylor, chairman of the Royal Bank of Canada, and Donald Fullerton, chairman of the Canadian Imperial Bank of Commerce—in Toronto just two days after his appointment. At that meeting, he reportedly sought assurances that the lenders would relieve the immediate pressure on the company by not demanding debt repayments coming due before another meeting scheduled for April 6. Then, Johnson jetted to London for a similar meeting with O&Y’s British lenders.

But even as Johnson was meeting with the Reichmanns’ Toronto bankers, the family was already reshuffling some of its assets. In a move that took some observers by surprise, elder brother Albert Reichmann purchased O&Y’s 65-per-cent stake in Torontobased Camdev Corp. That company, the remnant of the fallen Campeau real estate empire, has assets worth more then $600 million, including real estate in Ottawa and a 12-per-cent

interest in a California grocery chain. And in a separate move, the family transferred title to one of its Toronto buildings, the waterfront Queen’s Quay Terminal, from O&Y to a separate corporation, RF Real Estate Investments.

In fact, most analysts say that despite their recent woes, the Reichmanns still control assets that outweigh their liabilities. Indeed, the Reichmanns’ holdings, estimated to be worth about $34 billion, range from investments in transportation, energy and forestry to real estate in 19 North American and European cities (page 38).

But after more than three decades of unparalleled success, the family is now plainly on the defensive. One reason is its ambitious $7billion plan to transform the old docklands area of east London into a glittering commercial centre (page 37). But financial experts say that the family’s passion for privacy may have contributed even more to its recent problems, as rumors of trouble at O&Y swept through money markets unchecked by any detailed data about the Reichmanns’ holdings.

Those rumors were at odds with the Reichmann image that prevailed throughout the

1980s. As the decade began, the Reichmanns rode a wave of acclaim for their astute purchase of eight office buildings in Manhattan in 1977—a time when that city was approaching insolvency. Shortly after the Reichmann purchase, New York began to rebound and their property, bought at bargain-basement prices, doubled in value. Then, in 1988, the brothers completed the audacious $1.5-billion World Financial Center development on the Manhattan waterfront, securing their reputation as real estate wizards.

Even as workmen put the finishing touches on that project, the family was branching out beyond real estate. Flushed with a steady flow of cash from rents on their expanding properties, the Reichmanns went on a buying spree. In quick succession, they took control of the world’s largest pulp-and-paper company, Abitibi-Price Inc. of Toronto, in 1981, as well as

the nation’s third-largest oil-and-gas producer, Gulf Canada Resources Ltd. of Calgary, in 1985. Then, in 1987, through Gulf Canada they acquired their first stake in Interprovincial Pipe Lines Ltd. of Calgary, one of the continent’s largest pipeline concerns. They also acquired interests in several other real estate companies, including Trizec Ltd. of Calgary.

Not all of the takeovers were friendly. In 1988, the family won a protracted—and hostile—battle for control of Chicago-based Santa Fe Pacific Corp., a conglomerate with holdings that include a railroad and an extensive real estate portfolio.

Towers: None of the Reichmanns’ campaigns, however, has carried as much risk as the picturesquely named Canary Wharf project—their vast and daring 71-acre development in east London’s former docklands. Defying obstacles that had discouraged a series of other developers from undertaking a project in the area, the Reichmanns began construction in 1987 of a 28-building complex of office towers, stores and parkland. Convinced that London would become the financial centre of a


Warning signs have flashed over the Reichmanns’ empire for more than a year.

unified Europe, Paul Reichmann declared that Canary Wharf would have the same cachet as “uptown New York.” Added the normally dour developer: “That was the exciting part that I could not resist.” Since then, the family has pumped $3 billion into the project, completing almost half of the planned office space. But since Britain’s 1980s boom turned into a recession and Europe’s unification became a more distant prospect, O&Y has struggled to find tenants for its development—the largest and most expensive in Europe.

The full extent of the Reichmann family’s problems may not become clear until its creditors force a complete accounting of its debts. What is already plain, however, is that the lingering effects of the 1980s boom and the recession of 1990 and 1991 have savaged the Reichmanns’ two-pronged strategy. In Toronto, London and New York, a surge of building

late in the last decade left an enormous surplus of unleased office space and deeply depressed commercial rents (page 41). At the same time, the economic slump has reduced prices for the resource-based commodities that Gulf and Abitibi-Price produce, cutting deep into the earnings of both companies. As a result, the Reichmanns found it increasingly difficult to raise the large amounts of cash they need to service their existing debt, as well as to finance the continuing construction at Canary Wharf.

Observers confirm, in retrospect, that the Reichmanns also violated a cardinal rule of successful real estate development by financing their longterm projects with volatile short-term loans. Much of the money that they used was raised from so-called commercial paper, debt that is normally renewed every 60 or 90 days. But as rumors about O&Y’S financial difficulties began to circulate in global money markets, jittery lenders insisted on redeeming their loans, not renewing them. Said one veteran dealer, who requested anonymity: “I’ve never seen a situation worse than that of the Reichmanns. They didn’t gradually abandon the market—they were chased out of it.” At the same time, investors unloaded shares in Reichmann-controlled companies—stripping $96 million from their market value in a single day last month.

Singed: With its sources of liquid capital reduced, the brothers had little choice but to appeal to their bankers for relief. Among the banks that have already loaned money to the Reichmanns are all of Canada’s Big Five except the Toronto-Dominion, which took the unusual step of issuing a statement to publicize its lack of involvement in O&Y’s debt.

As well, as many as 90 other international banks may have loaned money to the brothers’ projects. Last week, however, as Johnson began to negotiate new debt-repayment schedules, a spokesman for the federal superintendent of financial institutions reassured Canadian consumers that whatever the outcome, it would not threaten the standing of the

country’s banks. Said Nancy Murphy: “We have some of the best-capitalized financial institutions in the world. If they were burned, they would be singed—but they would not go up in flames.”

That also seems to be the case with the

Reichmanns themselves. According to some analysts, the panicky reaction that led many investors to bail out of O&Y commercial paper was largely exaggerated, because all the loans are secured against solid assets. At the same time, the value of those assets, by most estimates, easily exceeds the Reichmanns’ total indebtedness. The task facing Johnson is to manoeuvre O&Y through its shortterm crisis in available cash.

In the longer term, the most painful consequence for the reclusive brothers may be the intense public scrutiny of their affairs. It is an examination that they have fiercely avoided in the past. As a private company owned entirely by the three brothers, O&Y does not release detailed financial statements. And as long as the brothers bathed in the aura of untarnished success, lenders often sought little more than a handshake before approving assistance for the family’s projects. Said one banker: “The Reichmanns were the exception to every rule. You were a loser if you didn’t have some of their debt on your books.”

Fear: But when doubts arose about O&Y’S financial soundness, the policy of secrecy compounded its problems, Lenders suddenly realized that they had an extremely restricted view of the company. In the absence of reas“ suring information, many of them became very nervous. Said Steven Kressler, financial services analyst with Midland Walwyn Capital Inc. in Toronto: “Especially when the numbers are missing, the initial fear is bottomless.”

The Reichmanns’ aversion to providing financial data appears to have worked against them in other ways, as well. One of Canada’s two credit-rating agencies declined to publish reports on much of their short-term debt. Said Maria Berlettano, a credit analyst with Canadian Bond Rating Services Ltd. in Montreal: “You have to guess at too much. It’s just too difficult to determine and monitor values.” Now, however, the Reichmanns have little choice but to divulge the full extent of their investments and property, as anxious creditors search for assets to refinance or sell. And the brothers who gained much of their mystique by acquiring prime properties at depressed prices in the last recession now may be forced to sell more of their most prized assets at depressed prices during the current downturn. Indeed, the building that houses o&Y’s head office, as well as the Toronto Stock Exchange, has already been pledged to bankers for $300 million, even though a 1990 appraisal pegged the value of the 36-storey building at more than $530 million. That is only the first of what is certain to be an extensive list of reappraisals of the assets—personal as well as financial—of the three very private men whose decisions once did seem almost to be divinely guided.



Thomas Johnson once made an unusual claim for a banker: that he had never granted a loan. Last week, however, some industry analysts said that Johnson has many of the attributes that he will need in his new position as president of Olympia & York Developments Ltd., the Reichmann family’s private holding company. Johnson’s principal task: to restructure close to $23 billion of O&Y debt. As the former president of two of the seven largest banks in the United States, Johnson, 51, is already friendly with many of the chief executives he will be dealing with.

Johnson, who, with his wife of 22 years, Ann, has three teenage children, clearly likes to operate from a position of authority. In December, 1989, after six years as president of New York City-based Chemical

Banking Corp., he left to take the same title at archrival Manufacturers Hanover Trust Co., where he was promised that he would succeed the chairman. But when the two banks merged last July, Johnson’s two former bosses took over the top positions at the new venture. As the self-declared “odd man out,” he resigned.

The son of a successful Wisconsin luggage-maker, Johnson, who was raised a Roman Catholic, graduated in 1964 from Harvard and moved to the Philippines, where he taught business for two years before returning to Washington as an assistant comptroller in the defence department. After he joined the Chemical Bank in 1969, the institution developed an expertise in arranging the exchange of debt for equity. It is a skill that he may need to use in his new position, as he searches for ways to rearrange o&Y’s large debt and enormous assets into a form that the company can afford to sustain—and its bankers can afford to accept.