Not-so-foreign affairs

If things get any worse in Japan, the Providence Place mall could end up a Wal-Mart

by David Andrew Stoler

Despite a "What, me worry?" company line and a recent 48-point Providence Journal headline that read HONORING ALL COMMITMENTS, things do not look good for the Capital Company of America, or Capital America, the San Francisco-based lending firm which is financing construction of the Providence Place mall.

Capital America reported devastating losses for the six-month period ending September 30. But after those losses were apparently covered by the firm's parent company, the enormous Nomura Securities Co., Ltd. of Japan, the Journal reported that although "no one can predict whether Capital America will eventually try to sell some of its loans . . . it's unlikely that the Providence mall would be one of them."

The prediction was based on speculation from an assortment of anonymous sources, but the Phoenix got a very different story talking to industry insiders. On November 2, for instance, the Wall Street Journal reported that Capital America was offering insurance lenders the opportunity to buy their choice of loans (a practice known as "cherry-picking") from a $6 billion portfolio, and sources within the company say that Providence Place is probably included within the portfolio. What's more, real-estate investment experts say that this is both a bad corporate strategy, leaving Capital America with its worst performing loans, and a sign that the company is in desperate need of some dough.

John B. Levy, president of John B. Levy & Co., Inc., a real-estate investment banking company in Richmond, Virginia, says, "You don't want people to cherry-pick, to take all of the good loans and leave you the bad deals. [But Capital America] needs some liquidity. They're looking for other ways to get cash."

Making cash matters worse, Capital America agreed to pay out some $1.1 billion in mortgage financing this week for deals made before their financial troubles hit, raising clear concerns about the company's continued ability to finance the mall. Says Bob Restrick, a Connecticut-based commercial and residential real-estate investment consultant, "The question is, What is going to happen when [developers] need the rest of the money? If [Capital America] doesn't have the capital, what happens to the mall?"

Of even more concern is the possibility that the mall loan is in the cherry-picking portfolio, meaning that Capital America may be trying to sell the loan before the mall is completed. Court documents from a suit last year show that whoever owns the loan basically owns the mall, with up to 75 percent of Providence Place's net profits, starting on December 31, 2000, going to the loan owner (see "Who really owns Providence Place?," January 23.)

And according to a leading mall-development agency, a new owner would mean a new operating agenda and new demands to amend the standards so painfully debated on, written out, changed, edited, settled upon, disagreed upon, and finally agreed to by city and state officials. Maria Izzo Cartwright, vice president of corporate communications and marketing for Glimcher Realty Trust, a national mall developer from Columbus, Ohio, says, "A lot of developing a center is making those changes."

"Every time this loan changes hands, it could be subject to different conditions, and we don't know what conditions these may be," adds Bryant College professor of economics William B. Sweeney. "But you can be sure they'll be put there to protect the best interests of the lender."

In January, when Fleet Bank paused before handing out a multi-million-dollar loan to Commonwealth Development Corporation, the Providence Place mall development company headed in part by J. Daniel Lugosch, the Nomura Asset Capital Corp. (NACC) stepped in and came through with the $280 million the developer needed to keep the project going. Aside from a few qualms about turning over what is essentially ownership of the mall to a group that not only has no ties to the Ocean State but is part of a large multi-national with much at risk in such volatile foreign markets as Asia and Russia, reaction to news of the loan was limited. NACC had already invested $114.5 million in the project, the mall was already in the process of being built, and NACC was a huge upstart moneymaker for its parent company, the Japan-based Nomura Securities Company, which is arguably the largest bank in the world.

Not long after, though, the world economy went to hell. And just when no one thought they could get any worse, Japanese markets continued to decline and Russian markets disappeared altogether. Finally, on August 21, the US stock market experienced the biggest point drop in its history.

Reeling from the shock, Nomura spun off NACC into an independent entity in June -- Capital America. Then, in September, Capital America's founder and former chief executive officer (the man Business Week once called "by far the most profitable employee at Nomura Securities International, Inc., the US subsidiary of the huge Tokyo-based brokerage") announced he was resigning because his "vision of the future [did] not coincide with that of Capital America's current ownership."

By that time, Nomura was in serious trouble -- earnings reports released said that operations in the United States had yielded losses of some $1.16 billion, while the big Nomura, whose stock price has plummeted to their lowest level since 1984, was down $1.5 billion overall.

Outwardly, everyone remains optimistic about both the fate of Capital America and its involvement in the Providence Place mall. After all, Nomura has sunk nearly $1.6 billion in equity into their American subsidiary since September -- a sign, industry folk say, that they plan to continue to support Capital America. And in October, Cameron Brown, spokeswoman for Capital America, confirmed for the Phoenix that Capital America officials "are honoring all our commitments and we remain fully committed to the [mall] project.

"We want to get the permanent mortgage on it," she says. "It's a good loan; we are excited about it and its potential, and [Capital America] wouldn't walk away from that."

Still, while everyone remains cool on the outside, internally the economic strife has caused chaos at Capital America. Nomura Securities was expected to lay off some 2000 workers worldwide, while the 425 workers at Capital America are more than a bit concerned. One vice president inside the company told the Phoenix, "Do I know if I'm going to have a job tomorrow? No, I don't. I think I'm toast."

In a good market, Capital America's business paradigm is to buy all sorts of different loans with various levels of risk, securitize those, and then bundle the loans together and sell the good ones with the bad ones. According to Levy, however, when the distant Asian crisis hit America, companies began to hold tight to their cash. So, Capital America's principal commodity -- loans -- has suddenly become unwanted.

"[Capital America officials] have a business plan in which they are a conduit operation: they get to securitize those loans, sell them, get some annuity, and go on to other things," says Levy. "But no one knows when the merry-go-round is going to stop, and when it does, you're stuck for all these loans, and you can't do anything."

In this case, the merry-go-round stopped in August when the market crashed and took the bond and real-estate markets with it. Now, suddenly, a loan that Capital America bought for $1 billion would only be worth some $800 million -- and that's only if they can find someone willing to buy high-risk loans in an increasingly conservative marketplace. "They got stuck," Levy says.

At first, Nomura was quick to back up Capital America with an equity investment of $1.2 billion -- cash to allow the US company to continue running. But this wasn't enough to keep Capital America afloat forever. Indeed, according to Bryant College's Sweeney, the fact that Capital America is willing to let other companies cherry-pick from their huge portfolio of loans shows that they are still "definitely strapped."

At some point, Sweeney says, Nomura will need to say enough is enough. "A company can write off 4 or 5 percent losses, but when we're talking 7 or 10 or even 15 percent, then things are getting shaky and moving toward bankruptcy," he says.

Between losses and reinvestment in its American subsidiaries, Nomura Securities has lost only about 3 percent of their total value. But the losses by Capital America (which, as a private company, is not obligated to make their worth known) are, undoubtedly, a much higher percentage of Capital America's total value.

Asked to comment, P.J. Johnson, spokesman for Nomura's American holdings firm, Nomura Holding America, Inc., said simply that Nomura "won't speculate" as to whether they will continue to back Capital America if the losses continue. But in late October, Nomura did announce that it would not make any new loans, meaning Capital America's raison d'être has disappeared.

Says Levy, who has reported on Capital America for the Wall Street Journal, "[Capital America] are out of the business, and they're going to be out of the business for a while." Indeed, he says, there is even "some doubt" as to whether Capital America will be able to make a comeback.

If they can't, Sweeney says, Capital America "would be declared bankrupt, and it would have to be reorganized or sold to another company." And bankruptcy could have serious implications for the mall, he says, because the US Bankruptcy Court could forbid Capital America from lending more money -- i.e., from doling out the estimated $130 millionthey have yet to pay Providence Place's developers. "The court may put a closure on the lending of any more money. And then the developer would have to go out and get a loan for the remaining sum," Sweeney says.

Capital America, too, has already demonstrated that they would be willing to sell the entire loan even if they don't go bankrupt. "When you're trying to downsize and right-size, you get rid of everything you can," says Levy, adding that if the mall is part of the $6 billion loan portfolio that Capital America has put up for grabs, "someone could pick up that deal and own the mall."

Capital America's official response from Cameron Brown is only, "We are continuing to meet the terms of the loan." And although they had no comment as to whether Providence Place was in the $6 billion portfolio, a senior official at Capital America said last week that "it probably is, yeah."

When asked about this two weeks ago, Mike Doyle, spokesman for the mall developer, still managed to find the bright side. He says that if Capital America does sell the loan, it could actually benefit Lugosch and the developers. "If Nomura did not continue [backing up Capital America], it would have a perverse benefit for the developers, because banks would be beating down the door to step in" and take over a loan well below cost, says Doyle.

But if the loan switched hands and was bought by someone like, say, Wal-Mart, we also could have mall owners with a very different agenda than that of the original developers and owners. Doyle is quick to point out that "the state has to approve whatever financial project" would buy the loan and also all changes to the mall. But, really, what of it? Although Rhode Island officials clearly have demanded that the mall be an upscale shopping center, they also have clearly demonstrated just how desperate they are to have a mall at all.

Glimcher's Cartwright says that once a new owner takes over a project, the old plans are basically out the window. "We have taken over a couple of centers where the buildings were completed, and we have changed the mall concept totally," she says.

As an example, Cartwright cites a mall in Oletha, Kansas. About two years ago, Glimcher took it over even though the project was further along than Providence Place. "We came in and the building was finished. We had no input into the plans," she says. "But we changed everything inside the mall, which affects everything, including tenants, retail, and financing."

So while Oletha residents had been expecting a middle- to high-end mall in the Emerald Square mold, what they got after Glimcher took over was very different. "Consumers felt it was going to be a traditional center, but it is a value mega-mall, a mall that has modern fashions but sold through discount outlets, where things are discounted up to 30 percent," Cartwright says.

Could this happen here? Well, Rhode Island officials haven't exactly shown the stiffest backbone when extra demands have been made -- or when the original, agreed-upon plans have been changed by mall developers. In 1994, for example, Lugosch, who had agreed not to put a cinema inside the mall so that the city could build one downtown to attract people out of Providence Place and into the Downcity renaissance project, told the city that the mall couldn't be built without one after all. Providence officials said no way. End result: Providence Place mall will have a 20-screen cinema complex inside of it, while a seven-screener downtown is in the works.

Meanwhile, neither the mall developer nor the state seem to be too concerned about what might happen if things go bad -- a sort of "accentuate the positive" kind of attitude. Indeed, locally everyone seems to think a crisis that started years ago in Asia can't possibly mean death for the Shangri-La of upscale shopping planned downtown. But Restrick says this is an all-too-common belief that can blind people to the actual possibilities. "It's those kinds of things going on around the world that people think, `Hey that doesn't affect me,' " he says. "But, hey, they do."