How Portman and Lenders Came to Terms
After 12 1/2 months of wrangling, lenders put John C. Portman back in control of his farflung real estate empire.
Whereas entropy often dooms workouts, the strong figure of Mr. Portman held this one together. Lenders trusted the man who faced them in August 1990 and confessed to failure.
Banks Eager to Come to Terms
"It was the most embarrassing moment of my life to be standing up there under those circumstances," the 65-year-old developer recalled. "We obviously made some bad decisions. After 35 years, . . . all of a sudden, we got stupid."
Candor was only the first step in a tortuous process, one that ultimately showed banks are eager to come to terms with a big-ticket real estate developer who can prove he is the best manager for hard times. The difficult negotiations also underscored how smaller, unsecured creditors can play a disproportionately large role in real estate workouts.
By restructuring roughly $2.1 billion, Mr. Portman gained five years of breathing room plus an extra $8.25 million for working capital. A new collateral pool gave lenders th confidence to keep Mr. Portman's credit lines open. Thus, he averted his bankers' threat to pull the plug on a basket of wholesale marts, hotels, and office buildings.
One banker - who remembers the stunned silence that greeted Mr. Portman's startling admission of his company's problems - called the deal "a miracle."
Groups fought for position right up to the last minute, when Marine Midland Bank threatened to kill the agreement hammered out by more than 50 groups of creditors and investors.
When the smoke cleared, lenders had a framework for dividing the remains of the empire should it collapse and a way to participate in gains should things go well.
"I don't see any downside for the banks," said Robert Laughlin, director of real estate at Citicorp, which had perhaps the biggest stake in the workout's success. It has $375 million in construction loans for One Peachtree Center in Atlanta, which is in progress.
Over the years, Mr. Portman built a porfolio of landmark properties not only in Atlanta but also in New York, Detroit, San Francisco, Los Angeles, Singapore, and Shanghai.
Like many compatriots, Mr. Portman blames irrational lending by deregulated savings and loans and 1986 changes in federal tax law for putting real estate values into a tailspin.
Natural Disaster, Too
His own business suffered unusual stresses on top of those factors. His wholesale marts suffered after-effects of the leveraged buyout craze that led to debt problems for retailers, including L.J. Hooker, Robert Campeau, and Macy's.
The Tiananmen Square massacre in June 1989 in Peking hurt a big mixed-use project Mr. Portman was developing in Shanghai by virtually eliminating China as an attraction to Western businesses.
And the San Francisco earthquake of October 1989 scared guests away from a hotel Portman had just completed in that city, worsening a loss estimated recently in Forbes magazine at $40 million, after Portman finally sold the property.
"If the unusual things that had happened hadn't happened, we could have swum through the storm," Mr. Portman said.
Scorched-Earth Examiners
The final straw, it turned out, was belated recognition by banking regulators that real estate problems were not confined to Texas. In what bankers have compared to General Sherman's march from Atlanta to the sea, teams of regulators roved through the South in early 1990 putting intense pressure on banks to retire unsecured lines of credit.
Such lines represented a tiny portion of his total debt, $58.28 million. But Mr. Portman had been counting on that credit to keep his properties afloat through the hard times.
"There was no way we could retire the lines. There was no way we could collateralize these lines with individual pieces of property," Mr. Portman said. "The decision was: We call the banks as a group and deal with it by creating a collateral pool."
The result was one of the carefully staged "tent shows" that have become a specialty of Kenneth Leventhal & Co., a Los Angeles-based accounting firm.
Stressing a Distinction
One banker familiar with the shows said Mr. Leventhal harped on a contrast between the liquidation value of his client's assets and the value of those assets in a continuing business.
The first calculation "always shows the value of the assets is less than the value of the debt," the banker said. As for the other calculation, "Gee! It always shows the creditor gets repaid."
"The bar of soap we sell," Mr. Leventhal said, is that in a liquidation the lenders get nothing. "With a workout, they have hope."
In Portman's case, several bankers noted, there was a key difference from the usual Leventhal plan: Mr. Portman wasn't asking for a reduction in debt.
Banks' Show of Hostility
Like most tent shows, Mr. Portman's was greeted with "healthy skepticism" and "a significant degree of hostility," Mr. Leventhal said. "This is not a booster club. They ask very searching and critical questions. |Is everything here? Have you disclosed everything? What search has been done for undisclosed assets?'"
With some exceptions, the creditor group quickly embraced the concept of giving all lenders at least some claim on all of Portman's unencumbered assets, ranging from equity in commercial real estate ventures to his own home.
The workout includes a new debt repayment schedule and a requirement that the developer raise a reported $140 million from sales and refinancings in the next four years, in a plan to be administered by Price Waterhouse.
This concept is not unusual, but for Portman's workout a major obstacle loomed in getting all the banks to agree on how the new collateral should be divided.
Mission: Consensus
"In terms of complexity, it was unique in my experience," said Erick Berg, a partner at White & Case, which represented Swiss Bank Corp. initially and was later assigned to achieve a consensus.
In big restructurings of highly leveraged transactions, Mr. Berg said, "there are discrete groups of bank lenders, bondholders, subdebt holders, and trade creditors. But they're all lenders on the same exact entity. That tends to get people on the same wavelength."
In the Portman case, he said, more than 20 properties were involved, with differing equity and debt arrangements.
"Fortunately, many of the secured lenders were also unsecured, so there was never a dichotomy" similar to those that have plagued other real estate workouts, said Alvis E. Campbell, Mr. Portman's lawyer.
Clout of Unsecured Lenders
Still, Marine Midland, Chemical Banking Corp., DG Bank Deutsche Genossenschaftsbank, and Bank of Tokyo were identified within the group as "the pure unsecured" because they held no secured debt.
And despite the relatively small size of their claims - about $22 million was held by the "pure unsecureds," by one count - they carried a lot of weight in the negotiations.
Paradoxically, unsecured lenders have less to lose by throwing a developer into bankruptcy - reducing the chances of recovery for everyone - if things don't go their way.
In the Portman case, Marine, Chemical, and DG filed court claims against the Portman Cos. just in case the workout fell apart but never went beyond that preliminary step.
Lead lenders of the myriad syndicates secured by Portman properties included First Chicago Corp., Security Pacific Corp., Citicorp, and Swiss Bank.
They were joined in providing the new working capital line by Banque Paribas, Bank of Nova Scotia, Mellon Bank Corp., Unibank A/S of Denmark, and Bank South Corp.
In exchange for the new $8.25 million, this group gained first claim of up to $16.5 million on the collateral pool, but that claim will evaporate if the $8.25 million is repaid within a year.
In order to give the unsecured group an incentive to participate - which involved holding off five years before getting their money - a "carve-out" was arranged to give them first claim on any proceeds from a liquidation or refinancing of the Merchandise Mart in Atlanta, one of Portman's strongest properties.
Marine Midland's Concern
Marine Midland, a subsidiary of Hongkong and Shanghai Banking Corp., balked, and rumors spread through the banking and real estate communities that the deal was falling apart. Marine charged that some lenders on the much weaker Apparel Mart had negotiated a cross-default provision that linked the two properties, undercutting the unsecured creditors' senior position.
Marine Midland finally signed on after Swiss Bank, First Chicago, and other lenders on the unusual mart properties granted what they called "insignificant compromises" on the cross-default provision.
"As far as Marine is concerned, the transaction is teh best that the group as a whole could get," said Shaun M. Brady, Middle Atlantic district manager for Marine Midland Realty Credit Corp.
Officials of the other banks complained, however, that Marine had failed to do its homework early on. The cross-default proviso was needed, they said, to preserve synergies between the unique wholesale and trade show marts, which are financed separately.
Portman Still Daunted
The marts, which offer wholesalers showrooms and convention floors, also include a Gift Mart in Atlanta, with $132 million of financing arranged by Security Pacific Corp., and the $90 million San Francisco Fashion Centre, with financing arranged by Mellon.
The cross-default arrangement was meant to protect the other properties from a splintering of management that could occur if one mart went into default.
Now that he has a basis to move forward, Mr. Portman himself admitted that the real estate market is more daunting than ever.
"The real estate crisis in our country is bigger than all of us," he said.
But on the other hand, his focus is Atlanta, where the 1996 summer Olympic Games are expected to provide a tonic for tired real estate.
