After fighting a losing battle to avoid bankruptcy in Canada, Olympia & York Ltd., the world's largest real estate developer, continued pressing its lenders to allow it to control its prized properties in New York and London.
Olympia & York's strategy is to try to keep control of as much of the empire as possible to lay a foundation for a restructured and financially viable company, all accomplished without the complexities and risks of a lengthy bankruptcy proceeding in the United States that could take control of Olympia & York out of the hands of the Reichmann family of Toronto.
In London yesterday, Olympia & York's directors met with bankers to seek assurances that the ill-fated Canary Wharf development in London, a $3 billion residential, office and retail project, would not be forced into the British equivalent of a bankruptcy liquidation.
For now, bankers said, they would not try to seize the complex, which is under construction, and would continue to provide money for work on the site near the London docks. "No one is taking a precipitate action at the moment," one banker said.
As financial markets awoke yesterday to the news that Olympia & York had finally succumbed to bankruptcy in Canada, stock markets in London, Toronto and New York calmly accepted what many people had viewed as an inevitable step in the closing chapter in the 1980s real estate crisis.
Falling real estate prices, which began years ago in Houston and Dallas, and rolled across the country from coast to coast, had claimed the developer whose sheer strength and wealth had allowed it to withstand the downturn the longest.
In the United States, the company is now in the process of presenting long-term plans to each lender on its New York buildings that it hopes will win the support of its major banks, which include Sanwa Bank, Nomura Bank and Sumitomo Bank, all of Japan, as well as First National Bank of Chicago and J.P. Morgan of New York.
Among the things it is seeking from the banks are a moratorium on all principal payments on its mortgages in New York buildings and an agreement that the bankers and the company's bondholders will take whatever income is generated from nearly 23 million square feet of office space in New York City, and not move to take possession of the buildings when revenues fall short of the interest payments due, according to one banker.
All told, Olympia & York argues that the worth of its New York properties, which include the World Financial Center in lower Manhattan, exceeds by more than $1 billion the $5.9 billion debt that is owed on them.
But many bankers are skeptical about property values, after having lived through several bruising years of falling prices during a national real estate recession and because some Olympia buildings have not been appraised in years.
One example is 55 Water Street, in the financial district. Olympia says the building is worth $742 million, but real estate experts estimate that it might only bring about $200 million at today's prices.
"We believe there is net value in the New York portfolio," said an executive of the company who spoke on condition of anonymity. could do a Chapter 11 filing and that would buy time and get us financing but we do not want to take that route," the executive said.
Still, some real estate experts were skeptical. This is a multinational real estate restructuring and we haven't had one of these," said David Shulman, head of Salomon Brothers' real estate research. "Nobody knows what will happen. They are basically spinning out of control right now."
Olympia & York's chief strategist, Paul Reichmann, will also have to persuade the banks to contribute more money to properties that back their loans in New York because in some downtown buildings it has costly asbestos-removal and tenant-improvement needs that must be paid for if the properties are to continue attracting tenants.
Although the company is also trying to avoid a bankruptcy proceeding in the United states, it is trying to take advantage of the more debtor-friendly rules in U.S. bankruptcy law.
By contrast, the Canadian system is less biased in favor of debtors. By filing first for Chapter 11 protection for five of its major Canadian companies with U.S. assets, Olympia & York hopes to get the U.S. courts to take the lead in the restructuring of its Canadian arm.
The Canadian companies that filed for protection in Toronto have a total debt load of $14.9 billion, according to the court documents.
Olympia & York is only the latest and by far the biggest player to fall in a global real estate deflation and credit crunch that began in the Southwest United States in 1986 and eventually spread to Canada, Britain, France, and Japan.
Although the Reichmann family is believed to have enormous stores of wealth safely outside the reach of most of its creditors, their cash crisis that began earlier this year and that eventually led to this week's filings, symbolizes the fall of the bluest of the blue-chip real estate companies in the world.
It was commonly said, even after the company initiated a restructuring of its debts and ran to banks across the world for emergency loans, that if Olympia & York could not survive this real estate downturn no developer encumbered with debt is immune.
On Thursday, real estate executives saw the fruition of the disaster that many said was planted in the 1980s with massive overbuilding of office space around the world and ,wildly inflated real estate values spurred by a flood of institutional money bidding up the prices of office buildings.
Although Olympia & York's vast array of office and retail properties in the United States and its Canary Wharf project in London are not in bankruptcy, the fall of the parent company and its entire Canadian arm is indicative of the severity of the problems that have trampled office developers across the world.
It still remains to be seen whether the company can keep its lenders from fighting among each other and moving separately to seize collateral in the United States, much the way things went in Canada. If that happens, a Chapter 11 filing is a near certainty.
"No one could have predicted the massive downturn that we've seen in this market and in London," said a senior official of Olympia & York who asked not to be identified.
"Look at the natural resources side -- which was designed to be countercyclical to the real estate market because generally when real estate prices go down oil goes up -- who could have predicted that they both would have been on the same roller coaster going down?"
Indeed, a recent study showed that property lenders reduced by about $2.4 billion the amount of money they have lent to the industry last year by refusing to roll over maturing loans and demanding that borrowers repay.