Greycoat rescue hangs in balance: Tom Stevenson explains why preference shareholders oppose Postel's rescue plan

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SHORTLY after 10 o'clock tomorrow morning, the players in the property industry's most compelling poker game will put their cards on the table.

At stake is the future of one of the Eighties' most acclaimed office developers, and with it the credibility of one of fund management's most high-profile figures.

In a sequence of meetings four classes of shareholder will vote on a proposed rescue of Greycoat, the developer and owner of some of London's most prestigious buildings, by Postel, which invests the pensions of BT and Post Office employees.

The complex deal, masterminded by Postel's chief executive, Alastair Ross Goobey, has met with little gratitude. Preference shareholders, with the power to vote down the deal, are unhappy with the way they come out of the restructuring, which could see Postel ending up with 88 per cent of Greycoat.

Unless three-quarters of all classes approve the deal, Postel says it will walk away, leaving Greycoat to probable receivership.

In the vanguard of the opposition are preference shareholders including two American securities houses, Goldman Sachs and Gruss Partners. Their objection hinges on Greycoat's valuation of its properties, which they claim too low.

Far from there being nothing left for shareholders after creditors have been paid off, the preference holders believe that an upturn in property values this year has left Greycoat's estimates of forced sale prices hopelessly out of date.

They claim the only winners from the Postel deal will be the fund itself, which will have picked up an attractive portfolio of well- let properties at near the bottom of the market, and Greycoat's directors, who will live to ride another cycle after many of their peers have had to throw in the towel.

If he loses, Geoffrey Wilson, Greycoat's chairman, will be forgiven a wry smile. The company that came a cropper because of its love affair with arcane financing, could yet be killed off by the complexity of its rescue.

Greycoat's demise would mark one of the final nails in the coffin of the Eighties property boom. Along with its rivals Rosehaugh and Stanhope, whose guiding force, Stuart Lipton, is Greycoat's eminence grise, the company produced some of the capital's most exciting buildings.

The company's most visible achievement, and the building of which Mr Wilson is proudest, is the superb granite ocean liner of an office block towering over Charing Cross station.

Floodlit at night, reflected in the Thames below, Embankment Place exemplifies his belief in the need for high-quality workplaces and his faith in cities.

'People need offices as a place of intellectual exchange,' he said. 'Cities are where one intellect is honed on another.'

But Embankment Place also defined Greycoat's other distinguishing feature. Until recently it prided itself on the sophistication of its financing as much as the quality of its buildings.

Among its peers, only Rosehaugh competed with Greycoat in terms of the innovative, elaborately structured nature of its funding arrangements. They differed in detail but all shared the same premise - the relentless rise of rents and property values.

The funding of Embankment Place was a classic example. With the initial income insufficient to finance its capital cost, estimated at about pounds 160m, Greycoat could have pre-sold the development to an investing institution and pocketed the developers' profit.

That, however, was not its style. Greycoat's philosphy dictated that it should hang on to an investment in the buildings it constructed. So, to maintain a stake in the development, it financed the building with borrowings of pounds 135m plus a zero coupon bond for the balance.

The bond raised pounds 21.5m, but in return for no interest payments in the meantime it promised to repay holders pounds 50m in 1995.

The underlying assumption of that deal, and others financed by even more complex financial instruments such as stepped interest bonds, was that property values would continue their inexorable rise.

But the collapse in property values undermined that premise. Between 1990 and the beginning of this year Greycoat's shares lost nearly all their value as it became increasingly obvious that what it had really achieved was only the postponement of financial reality.

Despite a programme of cost- cutting and disposals, Greycoat was floundering in a quagmire of debt. The philosophy that enabled Mr Wilson to undertake more than pounds 800m worth of developments in central London alone was always fatally flawed.

'The whole business is predicated on growth,' he said. 'There will be growth ultimately - you can't say with precision when it will be.

'The purpose of the financings is to allow us to keep the developments. We are there when the building comes into value.'

Or not, as the case may be. In his book Bricks and Mortals, Mr Ross Goobey concludes his discussion of Greycoat with a prescient remark that, with the benefit of hindsight, could be taken as a statement of intent.

He says: 'Nobody doubted the quality of the properties, only the ability of Greycoat to remain the owner.'

For Postel, the rescue of Greycoat provides a neat way for the pounds 23bn fund to jump into UK property without entering a contract race or moving market values.

When Mr Ross Goobey started trawling through troubled property companies to restructure, Greycoat stood out because of the high quality of its buildings and the strength of its tenants, most of whom are tied into long leases.

Apart from Embankment Place, which is let to Coopers & Lybrand, the company's other prizes include Britannic House, the redeveloped Lutyens building in Finsbury Square housing BP, and 123 Buckingham Palace Road, where the tenants include the Department of Trade and Industry and PA Management Consultants.

If Postel's deal is scuppered by disgruntled shareholders, it will be because a clever deal was not clever enough in the property industry's most demanding area - timing. Tomorrow Mr Ross Goobey will find out just how deft his own touch has been.

(Photograph omitted)