BUSINESS

A CLASH OF THE TITANS

WRANGLING WITH ITS CREDITORS, REAL ESTATE GIANT O&Y NOW FACES ITS GROWING ANXIETY IN A PUBLIC ARENA

DEIRDRE McMURDY June 1 1992
BUSINESS

A CLASH OF THE TITANS

WRANGLING WITH ITS CREDITORS, REAL ESTATE GIANT O&Y NOW FACES ITS GROWING ANXIETY IN A PUBLIC ARENA

DEIRDRE McMURDY June 1 1992

A CLASH OF THE TITANS

BUSINESS

Forty-five minutes before the show began, there was not a seat left in the house, and throngs of latecomers jostled for standing room amid the buzz of excited conversations. Indeed, the carnival atmosphere that accompanied the court appearance of lawyers for embattled Olympia & York Developments Ltd. in Toronto last week was sharply at odds with the sedate wood-panelled premises of the Ontario Court of Justice. O&Y was there to defend itself against the challenges of its increasingly restive creditors. Under the federal bankruptcy code, the Companies’ Creditors Arrangement Act, lenders are entitled to air their grievances in court and to petition against the debtor protection that is allowed under the act. But because of the number of parties with claims against O&Y, there were more black-gowned

WRANGLING WITH ITS CREDITORS, REAL ESTATE GIANT O&Y NOW FACES ITS GROWING ANXIETY IN A PUBLIC ARENA

legal advisers than official seats before the judge’s bench. Some lawyers took refuge in the dock, which is usually reserved for prisoners; others crouched on the courtroom floor along with their crates of documents. As Justice Robert Blair ascended to his seat, he said: “I’m just sorry we weren’t able to get Roy Thomson Hall for this event.”

Despite the serene presence of the grey-bearded judge in his sombre robes and crimson sash, it rapidly became apparent that chaos was rampant. Even many lawyers seemed unaware of who represented which creditors. They were equally un§ certain about one another’s § claims, the security on which I those claims are based and K what potential conflicts of inI terest might lie ahead. When I O&Y’s legal team unexpected“ ly proposed to ease creditor anxiety about the company’s use of cash flow from Canadian holdings to support faltering operations in the United States and Britain, the creditors’ lawyers were caught off guard. The lawyers retained by the Reichmann family to represent privately owned O&Y said that they had not had enough time to notify the creditors of the proposal before they presented it in court. Said Steven Sharpe of Davies Ward & Beck, one of the three firms representing O&Y in Canada: “This is a race that could go to the insomniacs—whoever can stay up the latest and generate the most paper wins.”

To allow for discussion of O&Y’s move, which marks a departure from the established practice of “commingling,” lumping together all its revenues and allocating them wherever needed in its sprawling international empire, Blair granted the lawyers a half-hour recess and they dashed to nearby pay phones to call their clients. When the court session resumed, there was grudging support among the creditors’ representatives for O&Y’s offer to segregate the cash flow from each operation and account for it separately. In fact, the only real agreement among all the lawyers was to institute a document stating who in the crowd represented which client.

Blair upheld the proposal that O&Y should separately account for each asset, at least on an interim basis. He also ordered the company not to dispose of any assets without informing its creditors and the court. But one issue that remained outstanding was the creditors’ bitter complaint that they have insufficient financial information from O&Y to assess the merits of any steps towards restructuring its $14.9billion debt. Said Edwin Weir of McMillan Binch, which represents the Royal Bank of Canada: “The company has to get its mind around the fact that the creditors urgently

need information or we can’t proceed.” In the course of the hearing—which resumes this week—lawyers for the Bank of Nova Scotia, which has outstanding loans of $630 million, emerged as the most aggressive on the subject of O&Y’s financial disclosures. “We are asking the company to balance its chequebook and it is saying it can’t even do that,” said David Baird of Tory, Tory, Deslauriers & Binnington.

The pressure on the Canadian chartered banks that have lent money to O&Y without significant information about its operations has intensified increasingly. As the banks report their earnings for the first half of their 1992 fiscal year this week, investment analysts say that they will have to take write-downs on their nonperforming loans to the Reichmanns. Last week, National Trustco Inc. of Toronto, Canada’s third-largest trust company, announced the reclassification of a $29.5-million loan to O&Y as nonperforming—the first Canadian financial institution to do so. “It's a preview of coming attractions,” said one Bay Street bank analyst, who requested anonymity.

Reichmann lawyer David Brown, of Davies, Ward & Beck, attempted to dismiss insistent calls for information as demands for “minutiae.” He suggested that the creditors organize themselves and appoint someone to negotiate with O&Y on their behalf instead of subjecting the company to a barrage of information requests. But Blair tried to address the information issue in his direction to the legal counsellors.

He ordered O&Y to immediately provide Canadian creditors with a summary of one week’s cash flow. He said that when the hearing resumes, he will also review and rule on the role to be played by Bernard Wilson, an accountant from Price Waterhouse who has been named as O&Y’s financial information officer. Wilson was present at the hearing with his own lawyer.

While the Toronto court appearance was a rare public conflagration, it was not the only fire O&Y had to fight last week. In addition to the relatively informal proceedings before Justice Blair throughout the week, O&Y confronted U.S. bondholders and Canadian commercial-paper inves-

tors, sold assets and appeared in court in London.

On May 19, at a meeting in New York City with investors who own $513 million worth of bonds secured by the 53-storey Manhattan office tower at 55 Water St., O&Y took a tough stance. Unable to sustain interest payments on the bonds beyond June 30, the company handed the financial responsibility for the building to the bondholders. In a statement, O&Y specified that it “does not intend to advance any funds to

support the building’s operation.” The bondholders have now formed a committee to review their options, including seizure of the asset, which O&Y bought in 1977.

On the same day, Abitibi-Price Inc. of Toronto, a money-losing forest-products company 82-per-cent owned by O&Y, suddenly announced the $340-million sale of its most profitable division, its distribution arm, to Aleo Standard Corp. of Valley Forge, Pa. Abitibi president Ronald Oberländer insisted that the sale was merely part of his strategy to reduce corporate debt and did not have any relation to its parent company’s financial difficulties.

There was also a surprise in store for investors owed about $250 million in commercial paper, secured by the Exchange Tower in downtown Toronto, last week. The commercial-paper holders have publicly criticized O&Y and the trustee for the investment, the Royal Trust Co., for the slow response in dealing with their repayment, which was due last March. But at the end of a six-hour meeting on May 20, it emerged that O&Y and its banks control 55 per cent of the issued commercial paper. Because two-thirds of the investors had to approve the proposed formation of a committee to represent their interests, the effort failed without the support of O&Y. Another meeting is scheduled for June 2.

In London, also on May 20, O&Y was in court attempting to appeal a $283-million judgment related to a dispute with U.S. investment bank Morgan Stanley. And at week’s end, the British government was still reviewing the possible relocation of thousands of civil servants to vacant office space at O&Y’s troubled Canary Wharf project.

One bright spot in an otherwise dismal week for beleaguered O&Y saw the company strike a deal with New York City regarding its $88-million municipal tax bill, which is due at the end of June. The city has agreed to let the company, the largest landlord in Manhattan, spread the tax payment over a six-month period in return for prepayment of a late-payment penalty.

In the coming months, as O&Y’s administrators and advisers contend with scores of loose ends in court and in private negotiations, the only certainty is that the frayed patience of creditors will be stretched even further. In his opening remarks to the Toronto court last week, O&Y lawyer Yoine Goldstein of Goldstein, Flanz & Fishman predicted: “We have embarked on a journey together and there will be turbulence.” It was a clear call for those on board to fasten their seat belts.

DEIRDRE McMURDY