Investors in distressed securities are staking claims in Cadillac Fairview Inc., acquiring the subordinate debt from pension funds at 20 to 22 cents on the dollar, according to sources.
The $400 million defined benefit fund of Centerior Energy Corp., Independence, Ohio, sold off its Cadillac Fairview debt, getting $4 million for an investment that was purchased for $27 million in 1987, said Greg Tropf, senior investment analyst.
The fund, which had written down its investment in the financially troubled company composed of Canadian malls and office buildings to $17 million, sold it to Oppenheimer & Co., said Mr. Tropf.
The State of Connecticut Trust Funds also is selling its shares. It has signed a confidentiality agreement with Oppenheimer, according to a fund spokeswoman. The system invested a total of $50 million in Cadillac Fairview, and the investment was valued at $42 million by system officials in April.
Among the rumored buyers of the pension debt from Oppenheimer is the $1.7 billion pension fund of Weyerhaeuser Co., Tacoma, Wash. Peter Sherland, director-pension fund investments with Weyerhaeuser, said the fund is not a buyer, but sources knowledgeable about the trades confirm the fund did indeed acquire the debt through Oppenheimer.
Janice Stanton, senior vice president-high yield with Oppenheimer, declined to comment.
The other investors are described as institutions that buy troubled or bankrupt securities on behalf of other investors.
The sell-off by some pension funds comes at a time when the directors of the Canadian real estate company are searching for a strategic partner to help restructure Cadillac Fairview's debt, which totals between $3.3 billion and $3.6 billion (Canadian).
The company has opened its financials for review to potential investors and will seek bids at the end of June, according to sources. A number of investors have signed confidentiality agreements.
The current recapitalization plan follows two that were shot down by the shareholders and banks that made corporate-level loans to the company. In August, the pension funds declined to inject an additional C$1 billion into the fund to prepay C$600 million of outstanding property debt and C$400 million of corporate indebtedness.
A review of Cadillac Fairview's financial condition by J.P. Morgan Securities Inc., New York, was rejected by the banks. J.P. Morgan recommended the members of a 40-bank consortium that lent C$1 billion to the company in 1987 when it was taken private, be repaid at 80 cents on the dollar.
Ironically, about three-fourths of the banks have since sold their debt for around 80 cents on the dollar.
Although J.P. Morgan's recommendations were not implemented, it appears the management is following parts of the strategy. The investment bank recommended the "immediate sale of selected non-strategic assets to fund up to C$150 million of the company's near-term liquidity needs."
The Ontario Teachers Pension Plan Board announced June 1 it paid C$150 million for the remaining interest in three shopping centers it co-owned with Cadillac Fairview.
Meanwhile, although Centerior lost 85% of its investment, Mr. Tropf said the pension fund made the right decision. According to him, if Centerior held the debt, and had Cadillac Fairview successfully recapitalized, it would have been 10 years before the fund could get its money, and that would be $17 million, the amount being carried on the books until the recent sale.
"We made the right move at the right time," said Mr. Tropf. "Time will tell if we made the right choice."