UK: "Alternative City" or East End ghost town? - OLYMPIA AND YORK'S CANARY WHARF.

UK: "Alternative City" or East End ghost town? - OLYMPIA AND YORK'S CANARY WHARF. - When Salomon Brothers, one of Wall Street's most powerful investment houses, was putting together a $930-million mortgage package for the US subsidiary of Olympia and Yor

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Last Updated: 31 Aug 2010

When Salomon Brothers, one of Wall Street's most powerful investment houses, was putting together a $930-million mortgage package for the US subsidiary of Olympia and York, its representatives asked to inspect some of the company's financial records. Finally they were told, with extreme reluctance, "We'll do for you what we do with our banks. We'll let you see the documents, but we'll tape them to the top of the desks you can't leave the building with them. And you can't take notes."

On that kind of basis, the deeply secretive Reichmann brothers, operating out of Toronto, were able to build up a worldwide property empire with accumulated debts of well over £11 billion, before being forced to reveal the extent of the financial problems that have now overwhelmed them.

No fewer than 100 banks had been happy - indeed eager and hungry - to help them raise the money, without even bothering to consider the possible extent and nature of other people's involvement. One project alone, the Canary Wharf development in London's Docklands, carried a price tag of £4 billion when its affairs were put into administration earlier this summer, and was still absorbing fresh capital at the rate of £1 million a day.

However, there was no systematic, long-term attempt here to deceive and defraud: quite the reverse. When Paul Reichmann, the most forceful and able of the brothers, decided in 1988 to take over the Canary Wharf scheme and create an "alternative City" three miles to the east of St Paul's, he was convinced it would be possible to achieve this entirely from Olympia and York's own resources.

At that point the company, which was already far and away the most spectacularly successful property operator in North America, had net assets of £5.3 billion and borrowings of only £960 million, and for the first three years the building work which soon started to transform London's eastern skyline was funded entirely from internal cashflow.

The original plan was to wait until Phase I was completed, with the basic framework of roads, squares, piazzas and services in place, and then start bringing in outside partners to take over responsibility for each of the many separate buildings.

But by late 1990, when that point was reached, the whole of the world's real estate industry had lurched into recession. Saddam Hussein was in Kuwait, investors everywhere were in a blue funk, and Olympia and York was suddenly in deep trouble.

Just how deep, though, took some time to emerge. There was little problem in the initial stages in finding enough cash to keep construction going. In November 1990 a specially-created Club of 10 banks (including Barclays, Lloyds, Credit Suisse, Hong Kong and Shanghai and a group of North Americans led by Olympia and York's oldest and most loyal supporter, the Canadian Imperial Bank of Commerce, where Paul Reichmann himself sat on the board) proved more than ready to put up $500 million.

That did not last long, though, at the rate Canary Wharf was eating money, and the going got much tougher when a second injection was required.

Efforts, in late 1991, to raise a further £300 million secured on the main Canary Wharf Tower, foundered when one of the members of a second, and different, bankers' Club got last-minute cold feet. Although, at it later transpired, the three biggest Canadian banks, had secretly got together to provide a further £450 million (on terms which significantly damaged the interests of other lenders) that was still not enough. It then took a further four desperate months to lash together a temporary subvention package - this time, a meagre £130 million repayable in a bare two years - and by then it was already too late.

On 13 March this year, it at last became clear just how Olympia and York had kept its reported borrowings so low. Its globally-ramifying activities had been mainly financed, at much cheaper rates than the banks would have charged, through massive issues of short-term commercial paper and bonds secured on the fabric of particular buildings, especially in Manhattan. That was fine, and very sensible, as long as the interest was paid on time and the note-holders remained happy.

But now, as payment dates started to slip and Dominion, a leading Toronto credit-rating agency, issued a gloomy re-assessment of the Reichmann status, an ever-increasing number of former supporters indicated they were no longer prepared to renew their commitments. There were three desperate attempts to raise more Canary Wharf money in London - £250 million through an enterprise Zone Unit Trust, a £300-million loan from Morgan Stanley secured on the building they were already occupying, and another £250 million to be borrowed against Canary Wharf Tower. But as the bad news intensified from across the Atlantic, each of these in turn collapsed.

When the administrators finally moved into Canary Wharf on 30 May they were faced with a one-month deadline, to find new investment backing and the task of persuading the Government that they should fill the offices with civil servants. Otherwise there would be liquidation, with the threat that the whole grandiose affair would become another East End ghost town.

At the time of writing, that has still not happened, and Olympia and York's new president, the ex-Chrysler executive, Gerald Greenwald, is still talking about the chances of bringing in fresh capital - at least the £300 million needed to finish Phase I. But he confessed, as he reported a £1-billion loss and another £700-million writedown for the year ending 31 January, that "we don't have the financial resources to put up anything".

There appears to very little tangible, in other words, to back his claim that "we believe we know how to complete Canary Wharf in a way that no other entity can match". It had the unmistakable sound of a man whistling in the dark.

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