O&Y; to Sell N.Y. Skyscraper to Bondholders

NEW YORK — Olympia & York agreed Tuesday to sell a 53-story skyscraper to bondholders in perhaps the biggest debt restructuring of its kind to involve a U.S. office building.

To some, Olympia & York’s surrender of its 55 Water St. building in lower Manhattan signals its first major restructuring of a real estate debt since it filed for bankruptcy protection in the spring.

“I think it shows their willingness to deal with bondholders in a reasonable way,” said Thomas Facciola, an associate with S. G. Warburg & Co., a securities firm.

At the very least, resolution of the building’s troubles allows O&Y; to focus its energies on saving its most desirable properties, such as the gigantic World Financial Center, also in lower Manhattan.

Toronto-based Olympia & York Developments Ltd. placed its Canadian and British holdings under bankruptcy court protection in May after talks collapsed with bankers over restructuring about $17.5 billion of debt. The gigantic developer has been struggling to avoid bankruptcy court protection for its New York buildings and other key U.S. properties.

Under the proposal, O&Y; and a committee of bondholders agreed to swap about $548.25 million in short-term notes for a 100% ownership stake in 55 Water St., the largest privately owned building in New York City. It’s also one of the largest office buildings in the country.

The bondholders will agree to invest $21 million, in the form of a new preferred stock, to be used for improvements to the building, which has deteriorated in recent years.

The deal gives the bondholders ownership of the building and pays off the mortgage, making it the largest debt-free office tower in New York City, said David G. Bronner, chief executive of the Retirement Systems of Alabama, a major pension fund.

The Alabama pension fund, which holds about $100 million in the Water Street bonds, plays a key role in the debt restructuring. The fund said it is prepared to purchase the shares of any bondholders not interested in ownership of the building at $7.45 a share--the same price the Alabama fund would receive under the deal.

That would mark one of the largest real estate investments by a pension fund in commercial real estate in recent years, said Bronner and analysts. The Retirement Systems of Alabama now has less than 1% of its assets tied up in real estate, enabling it to assume the risk for such an investment, Bronner said.

“We’re looking at this as a long-term holding,” Bronner said in an interview.

The deal would also leave a $50 million cash surplus, said Wilbur L. Ross Jr., senior managing director of Rothschild Inc., which advised some of the note holders. Cash flow from leases and the lack of any debt will enable the building managers to pay for expensive improvements to lure new tenants. Major leases expire in the building starting next year.

If the deal is approved, 55 Water St. “will probably be the strongest building in New York from a financial point of view,” Ross said.

Analysts said such a large investment bodes well for the future of New York City’s property market, which has been hit hard by the collapse in commercial real estate prices. Such a major investment is a signal that property prices may be close to hitting bottom, said Facciola, the Warburg analyst.

Bronner and the note holders who cut the agreement with O&Y; hold 30% of the Water Street bonds. The deal requires the approval of an additional 32% of the remaining bondholders and could become effective by March.